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A Behavioral Local Public Finance Perspective on the Renter’s Illusion Hypothesis

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Abstract

In this paper we argue that renter’s illusion may not be a form of asymmetric information neither irrationality but rather a way to include in our economic analysis evidence that while homo oeconomicus aims to do a good job of making choices, he frequently is not able to do that. Taxpayers do not know the “objective” world but take decisions according to mental and often biased representations of “their” world. We develop a simple model where misperception plays a fundamental role in the behavior of renters and allows overcoming the dichotomy between rational and irrational renter's behavior. In the paper we also pursue the two complementary aims of introducing “cognitive limitation” into the theory of local public finance and of filling a gap in this literature regarding the lack of micro-foundations for the renter’s illusion hypothesis.

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1303.

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Length: 27 pages
Date of creation: 18 Feb 2013
Date of revision:
Handle: RePEc:ays:ispwps:paper1303

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Keywords: Renter effect; Renter’s illusion; Fiscal illusion; Behavioral local public finance.;

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  1. Campano, Fred & Salvatore, Dominick, 2006. "Income Distribution," OUP Catalogue, Oxford University Press, number 9780195300918, September.
  2. Roberto Dell'Anno & Vincenzo Maria De Rosa, 2013. "The Relevance of the Theory of Fiscal Illusion. The Case of the Italian Tax System," HISTORY OF ECONOMIC THOUGHT AND POLICY, FrancoAngeli Editore, vol. 2013(2), pages 63-92.
  3. Roberto Dell’Anno & Paulo Mourao, 2012. "Fiscal Illusion around the World," Public Finance Review, , vol. 40(2), pages 270-299, March.
  4. Robert P. Inman, 1985. "Does Deductibility Influence Local Taxation?," NBER Working Papers 1714, National Bureau of Economic Research, Inc.
  5. H. Spencer Banzhaf & Wallace E. Oates, 2012. "On Fiscal Illusion and Ricardian Equivalence in Local Public Finance," NBER Working Papers 18040, National Bureau of Economic Research, Inc.
  6. Metcalf, Gilbert & Feldstein, Martin, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Scholarly Articles 2766699, Harvard University Department of Economics.
  7. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
  8. McFadden, Daniel, 1999. "Rationality for Economists?," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 73-105, December.
  9. Lovell, Michael C, 1978. "Spending for Education: The Exercise of Public Choice," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 487-95, November.
  10. Megna, Richard H & Lee, Tong Hun, 1990. "Estimation of the Demand for Local Public Education under a Kinked Budget Constraint," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 596-602, November.
  11. Oates, Wallace E., 2005. "Property taxation and local public spending: the renter effect," Journal of Urban Economics, Elsevier, vol. 57(3), pages 419-431, May.
  12. Jorge Martinez- Vazquez, 1983. "Renters' Illusion or Savvy?," Public Finance Review, , vol. 11(2), pages 237-247, April.
  13. Rexford Santerre, 1989. "Representative versus direct democracy: Are there any expenditure differences?," Public Choice, Springer, vol. 60(2), pages 145-154, February.
  14. Zodrow, George R., 2001. "The Property Tax as a Capital Tax: A Room with Three Views," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 139-56, March.
  15. Carroll, Robert & Yinger, John, 1994. "Is the Property Tax a Benefit Tax? The Case of Rental Housing," National Tax Journal, National Tax Association, vol. 47(2), pages 295-316, June.
  16. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  17. Holtz-Eakin, Douglas, 1992. " Elections and Aggregation: Interpreting Econometric Analyses of Local Governments," Public Choice, Springer, vol. 74(1), pages 17-42, July.
  18. Bogart, William T., 1991. "Observable Heterogeneity and the Demand for Local Public Spending," National Tax Journal, National Tax Association, vol. 44(2), pages 213-23, June.
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