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Does endogenous formation of jurisdictions lead to wealth stratification?

This paper examines the validity of the “folk” intuition that endogenous formation of jurisdictions is likely to create stratification of households according to their wealth. More specifically, we examine a simple model of jurisdiction formation, close in spirit to that of Whestoff ([27]), in which a continuum of unequally wealthy households endowed with the same preferences for one public good and one private good make a location decision in a finite set. Households who choose the same location form a jurisdiction. Within each jurisdiction, the public good is financed by a proportional wealth tax whose rate is decided by a social choice mechanism. The only assumption imposed on the mechanism is to select the most preferred tax rate of one member of the jurisdiction. We define a jurisdiction structure to be stable if it gives to no household any incentive to move away from its jurisdiction. We raise the question of whether stable jurisdiction structures will be stratified in the precise sense that if two households belong to one jurisdiction, then so do all households with intermediate wealth. We provide a necessary and, if households preferences satisfy an additional regularity property, sufficient condition on the households preferences that guarantees that any stable jurisdictions structure involves stratification in this sense. The condition is that the household’s most preferred tax rate must be a strictly monotonic function of its wealth.

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Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0306.

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Length: 26 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:iep:wpidep:0306
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  1. Konishi, Hideo & Le Breton, Michel & Weber, Shlomo, 1998. "Equilibrium in a Finite Local Public Goods Economy," Journal of Economic Theory, Elsevier, vol. 79(2), pages 224-244, April.
  2. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1984. "Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice," Journal of Public Economics, Elsevier, vol. 24(3), pages 281-308, August.
  3. Greenberg, Joseph & Weber, Shlomo, 1986. "Strong tiebout equilibrium under restricted preferences domain," Journal of Economic Theory, Elsevier, vol. 38(1), pages 101-117, February.
  4. Westhoff, Frank, 1977. "Existence of equilibria in economies with a local public good," Journal of Economic Theory, Elsevier, vol. 14(1), pages 84-112, February.
  5. Demange, Gabrielle, 1994. "Intermediate preferences and stable coalition structures," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 45-58, January.
  6. Ellickson, Bryan, 1971. "Jurisdictional Fragmentation and Residential Choice," American Economic Review, American Economic Association, vol. 61(2), pages 334-39, May.
  7. Rose-Ackerman, Susan, 1979. "Market models of local government: Exit, voting, and the land market," Journal of Urban Economics, Elsevier, vol. 6(3), pages 319-337, July.
  8. Dunz, Karl, 1989. "Some comments on majority rule equilibria in local public good economies," Journal of Economic Theory, Elsevier, vol. 47(1), pages 228-234, February.
  9. Guesnerie Roger & Oddou Claude, 1979. "Second best taxation as a game," CEPREMAP Working Papers (Couverture Orange) 7919, CEPREMAP.
  10. Bewley, Truman F, 1981. "A Critique of Tiebout's Theory of Local Public Expenditures," Econometrica, Econometric Society, vol. 49(3), pages 713-40, May.
  11. Konishi, Hideo, 1996. "Voting with Ballots and Feet: Existence of Equilibrium in a Local Public Good Economy," Journal of Economic Theory, Elsevier, vol. 68(2), pages 480-509, February.
  12. Paul W. Rhode & Koleman S. Strumpf, 2000. "A Historical Test of the Tiebout Hypothesis: Local Heterogeneity from 1850 to 1990," NBER Working Papers 7946, National Bureau of Economic Research, Inc.
  13. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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