The Tiebout Hypothesis: On the Existence of Pareto Efficient Competitive Equilibrium

We introduce a model of an local public goods economy with a continuum of agents and jurisdictions with finite population. Under an especially mild condition of boundedness of per capita payoffs we show nonemptiness of the core of the economy. We then demonstrate that the equal treatment core coincides with the set of competitive allocations. Under an additional condition ensuring that all outcomes in the core have the equal treatment property, existence of equilibrium follows from nonemptiness of the core and equivalence of the core to the set of equilibrium outcomes. Our approach provides a new technique for showing existence of equilibrium in economies with a continuum of agents.