tibeau model

8/18/2019 Tibeau Model

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Public i!"!c# "!$ Public Polic% &o!"'("! G)ub#) ou)'( E$i'io! Co*%)i+(' , -01- .o)'( Publi/(#)/

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What determines how much and howefciently public goods local governmentsprovide?

The market provides the optimal amount oprivate goods.

Why does the market do so well or privategoods but not public goods?

Tiebout’s insight: shopping andcompetition.

T(# Ti#bou' Mo$#l


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There is neither shopping nor competitionor national government.

But when public goods are provided at thelocal level by cities and towns competitionarises

o !ndividuals can vote with their feet .

This threat o e"it can induce efciency inlocal public goods production.

T(# Ti#bou' Mo$#l2 S(o**i!+ "!$ Co*#'i'io!


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#ompetition across towns can lead to theoptimal provision o public goods.

Towns determine public good levels and ta"rates.

$eople move reely across towns pickingtheir preerred locality.

$eople with similar tastes end up togetherpaying the same amount in ta"es andreceiving the same public goods.

There is no ree riding because everyonepays the same amount in each town.

T(# o)"l Mo$#l


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The Tiebout model re%uires a number oassumptions that may not hold in reality:

$eople are actually be able to move.

$eople have ull inormation on ta"es andbene&ts.

$eople must be able to choose among arange o towns that might match my tasteor public goods.

The provision o some public goodsre%uires sufcient scale or si'e.

There must be enough towns so thatindividuals can sort themselves into groupswith similar preerences or public goods.

P)obl#/ i'( Ti#bou' Co*#'i'io!


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The Tiebout model re%uires e%ual &nancing othe public good among all residents.

Lump-sum tax: ( &"ed ta"ation amountindependent o a person’s incomeconsumption o goods and services orwealth.

)ump sum ta"es are oten ineasible*unairso ta"es are income or wealth based.

But then the rich pay more than the poorso the poor chase the rich.

P)obl#/ i'( Ti#bou' Co*#'i'io!2 i!"!ci!+


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To keep poor people rom chasing rich peopletowns enact 'oning.

Zoning: +estrictions that towns place onthe use o real estate.

,oning regulation establishes or e"ampleminimum lot si'es.

,oning regulations protect the ta" base owealthy towns by pricing lower-incomepeople out o the housing market.

P)obl#/ i'( Ti#bou' Co*#'i'io!2 i!"!ci!+


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The Tiebout model assumes that publicgoods have eects only in a given town andthat the eects do not spill over toneighboring towns.

/any local public goods have similare"ternality or spillover eatures: policepublic works education.

! there are spillovers then low-ta" low-

bene&t municipalities can ree-ride o ohigh-ta" high-bene&t ones.

No E8'#)!"li'i#/9S*illo:#)/


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Tiebout competition works through sorting.

( testable implication: When people havemore choice o local community the tastesor public goods will be more similar amongtown residents than when people do nothave many choices.

#omparing larger and smaller metropolitanareas 0with more and less choice1 this

seems to be true.

R#/i$#!' Siil")i'% Ac)o// A)#"/


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$eople not only vote with their eet they alsovote with their pocketbook in the orm ohouse prices.

House price capitalization: !ncorporationinto the price o a house the costs0including local property ta"es1 and bene&ts0including local public goods1 o living in thehouse.

(reas with relatively generous public goods0given ta"es1 should have higher houseprices.

C"*i'"li="'io! of i/c"l Diff#)#!c#/ i!'o Hou/#

P)ic#/


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EVIDENCE2 E:i$#!c# fo) C"*i'"li="'io! f)o

C"lifo)!i">/ P)o*o/i'io! 13

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#aliornia’s $roposition 23 became law in2456.

o 7et the ma"imum amount o any ta" onproperty at 28 o the 9ull cash value.

o ;ull cash value: 8 at most.

+educed property ta"es immensely in someareas little change in others.


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ach @2 o property ta" reduction increasedhouse values by about @5 about e%ual tothe $A< o a permanent @2 ta" cut.

!n principle the all in property ta"es wouldresult in a uture reduction in public goodsand services which would lower homevalues.

The act that house prices rose by almost

the present discounted value o the ta"essuggests that #aliornians did not think thatthey would lose many valuable publicgoods and services when ta"es ell.

EVIDENCE2 E:i$#!c# fo) C"*i'"li="'io! f)o

C"lifo)!i">/ P)o*o/i'io! 13


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Tiebout model implies that three actorsdetermine local public good provision:

1. Tax-beneft linkages: The relationshipbetween the ta"es people pay and thegovernment goods and services theyget in return.

>. #ross-municipality spillovers in publicgoods.

3. conomy o scale in public goodprovision.

! ta"es and bene&ts are linked and thereare no spillovers or economies o scale

then local public good provision is close to

O*'i"l i/c"l #$#)"li/


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! ta"es and bene&ts are linked and thereare no spillovers or economies o scalethen local public good provision is close tooptimal.

therwise urther intervention may becalled or.

(ctual &scal ederalism does not necessarilyline up:

o (re there enormousspillovers*e"ternalities in education?

O*'i"l i/c"l #$#)"li/


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normous ine%uality in revenue acrossmunicipalities:

Weston /( raises @>233C*student while)akeville raises @226DD.

7hould we care?

o ! Tiebout is right then this reEectsoptimal sorting and &nancing.

o

But i not redistribution might be calledor.

o The main tool o redistribution isintergovernmental grants cash transersrom one level o government to another.

R#$i/')ibu'io! "c)o// Cou!i'i#/

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