Journal Article

Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition

Stephen M. Calabrese, Dennis N. Epple and Richard E. Romano

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 3, pages 1081-1111
Published in print July 2012 | ISSN: 0034-6527
Published online December 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdr048
Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition

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We examine the welfare effects of provision of local public goods in an empirically relevant setting using a multi-community model with mobile and heterogeneous households and with flexible housing supplies. We characterize the first-best allocation and show efficiency can be implemented with decentralization using head taxes. We calibrate the model and compare welfare in property-tax equilibria, both decentralized and centralized, to the efficient allocation. Inefficiencies with decentralization and property taxation are large, dissipating most if not all the potential welfare gains that efficient decentralization could achieve. In property-tax equilibrium, centralization is frequently more efficient! An externality in community choice underlies the failure to achieve efficiency with decentralization and property taxes: poorer households crowd richer communities and free ride by consuming relatively little housing thereby avoiding taxes.

Keywords: Local public goods; Tiebout competition; Residential externality; H73; H42; I22

Journal Article.  15064 words.  Illustrated.

Subjects: Publicly Provided Goods ; Education and Research Institutions ; Public Economics

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