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

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  • Stephen M. Calabrese
  • Dennis N. Epple
  • Richard E. Romano

Abstract

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. Copyright , Oxford University Press.

Suggested Citation

  • Stephen M. Calabrese & Dennis N. Epple & Richard E. Romano, 2012. "Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1081-1111.
    • Handle: RePEc:oup:restud:v:79:y:2012:i:3:p:1081-1111
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    File URL: http://hdl.handle.net/10.1093/restud/rdr048
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    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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