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The paper assesses spatial competition in diesel taxation among European governments. By adding an extension to the standard model, it is shown that asymmetric competition - small countries undercutting large - implies that small countries respond less strongly to tax changes by their neighbours than large countries do. An estimate is then made of the fiscal reaction functions for national governments, employing a first-difference regres-sion model with a weighting scheme constructed from road-traffic density data at national borders. Data from 16 countries (EU-15 minus Greece plus Norway and Switzerland) be-tween 1978 and 2005 provides evidence that European governments set their diesel tax interdependently, and moreover, that small European countries tend to react less strongly to changes in their competitors tax rate than large countries do.

Available at the website of the Eoóconomic Review