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

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  • Stephen Calabrese
  • Dennis N. Epple
  • Richard 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.

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  • Stephen Calabrese & Dennis N. Epple & Richard Romano, 2011. "Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition," NBER Working Papers 17251, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17251 Note: PE
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    Cited by:

    1. De Fraja, Gianni & Martínez-Mora, Francisco, 2014. "The desegregating effect of school tracking," Journal of Urban Economics, Elsevier, vol. 80(C), pages 164-177.
    2. Sieg, Holger & Wang, Yu, 2013. "The impact of unions on municipal elections and urban fiscal policies," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 554-567.
    3. Dinkelman, Taryn & Schulhofer-Wohl, Sam, 2015. "Migration, congestion externalities, and the evaluation of spatial investments," Journal of Development Economics, Elsevier, vol. 114(C), pages 189-202.
    4. Gravel, Nicolas & Oddou, Rémy, 2014. "The segregative properties of endogenous jurisdiction formation with a land market," Journal of Public Economics, Elsevier, vol. 117(C), pages 15-27.
    5. Coen-Pirani, Daniele, 2015. "Human capital accumulation in a federation," European Economic Review, Elsevier, vol. 76(C), pages 104-124.
    6. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, Elsevier.
    7. repec:bla:ijethy:v:13:y:2017:i:1:p:147-162 is not listed on IDEAS
    8. Matthew Davis & Fernando V. Ferreira, 2017. "Housing Disease and Public School Finances," NBER Working Papers 24140, National Bureau of Economic Research, Inc.
    9. Epple, Dennis & Romano, Richard, 2015. "Equilibrium and efficient provision of local public goods with peer effects," Research in Economics, Elsevier, vol. 69(3), pages 291-319.
    10. Levy, Gilat & Razin, Ronny, 2017. "The coevolution of segregation, polarized beliefs and discrimination: the case of private versus state education," LSE Research Online Documents on Economics 68532, London School of Economics and Political Science, LSE Library.
    11. Holmes, Thomas J. & Sieg, Holger, 2015. "Structural Estimation in Urban Economics," Handbook of Regional and Urban Economics, Elsevier.
    12. Zegras, Christopher & Nelson, Joshua & Macário, Rosário & Grillo, Christopher, 2013. "Fiscal federalism and prospects for metropolitan transportation authorities in Portugal," Transport Policy, Elsevier, vol. 29(C), pages 1-12.
    13. Florian Kuhlmey, 2017. "Income vs. property tax competition: A normative comparison," Working papers 2017/18, Faculty of Business and Economics - University of Basel.
    14. Hiroki Watanabe, 2016. "Let Tiebout pick up the tab: Pricing out externalities with free mobility," ERSA conference papers ersa16p134, European Regional Science Association.
    15. Rockoff, Jonah E., 2010. "Local response to fiscal incentives in heterogeneous communities," Journal of Urban Economics, Elsevier, vol. 68(2), pages 138-147, September.

    More about this item

    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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