Many studies show that policy makers react to the policy choices made in other jurisdictions, but we still know relatively little about the factors driving interdependent policy making, especially about how context shapes interdependence. Theoretical arguments suggest that contextual factors, such as stable institutions and geographic location, explain variation in interdependence. However, there is a lack of empirical research investigating contextual heterogeneity in interdependent policy making, mainly because it cannot be analysed with standard spatial econometric methods. This article introduces multilevel modeling that allows the study of contextual variation in interdependence and illustrates the method with the analysis of uneven tax competition in Switzerland. The findings of fine-grained data show that cantonal governments compete more strongly with their competitors the closer a unit is located to a metropolis with comprehensive public good provision. The analysis demonstrates that we can better understand the mechanisms of interdependent policy making by studying its contextual drivers.