IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Stephen Calabrese
  • Dennis N. Epple
  • Richard Romano

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w17251.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17251.

as
in new window

Length:
Date of creation: Jul 2011
Date of revision:
Publication status: published as Stephen M. Calabrese & Dennis N. Epple & Richard E. Romano, 2012. "Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1081-1111.
Handle: RePEc:nbr:nberwo:17251
Note: PE
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Dennis Epple & Richard Romano, 2000. "Neighborhood Schools, Choice, and the Distribution of Educational Benefits," NBER Working Papers 7850, National Bureau of Economic Research, Inc.
  2. Wilson, John Douglas, 1997. "Property taxation, congestion, and local public goods," Journal of Public Economics, Elsevier, vol. 64(2), pages 207-217, May.
  3. Hanushek, Eric A & Quigley, John M, 1980. "What Is the Price Elasticity of Housing Demand?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 449-54, August.
  4. Wildasin, David E., 1980. "Locational efficiency in a federal system," Regional Science and Urban Economics, Elsevier, vol. 10(4), pages 453-471, November.
  5. Ross, Stephen & Yinger, John, 1999. "Sorting and voting: A review of the literature on urban public finance," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 47, pages 2001-2060 Elsevier.
  6. Hardman, Anna & Ioannides, Yannis M., 2004. "Neighbors' income distribution: economic segregation and mixing in US urban neighborhoods," Journal of Housing Economics, Elsevier, vol. 13(4), pages 368-382, December.
  7. Jan K. Brueckner, 2005. "Fiscal Federalism and Economic Growth," CESifo Working Paper Series 1601, CESifo Group Munich.
  8. Panzar, John C & Willig, Robert D, 1976. "Vindication of a "Common Mistake" in Welfare Economics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1361-63, December.
  9. Bergstrom, Ted C, 1979. " When Does Majority Rule Supply Public Goods Efficiently?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(2), pages 216-26.
  10. DiPasquale, Denise & Wheaton, William C., 1992. "The cost of capital, tax reform, and the future of the rental housing market," Journal of Urban Economics, Elsevier, vol. 31(3), pages 337-359, May.
  11. Dennis Epple & Brett Gordon & Holger Sieg, 2010. "A New Approach to Estimating the Production Function for Housing," American Economic Review, American Economic Association, vol. 100(3), pages 905-24, June.
  12. Mayer, Christopher J. & Somerville, C. Tsuriel, 2000. "Residential Construction: Using the Urban Growth Model to Estimate Housing Supply," Journal of Urban Economics, Elsevier, vol. 48(1), pages 85-109, July.
  13. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  14. Davidoff, Thomas, 2005. "Income sorting: Measurement and decomposition," Journal of Urban Economics, Elsevier, vol. 58(2), pages 289-303, September.
  15. Hoyt, William H & Rosenthal, Stuart S, 1990. "Capital Gains Taxation and the Demand for Owner-Occupied Housing," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 45-54, February.
  16. Schmidheiny, Kurt, 2006. "Income segregation from local income taxation when households differ in both preferences and incomes," Regional Science and Urban Economics, Elsevier, vol. 36(2), pages 270-299, March.
  17. Blackley, Dixie M, 1999. "The Long-Run Elasticity of New Housing Supply in the United States: Empirical Evidence for 1950 to 1994," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 25-42, January.
  18. Charles A. M. de Bartolome & Stephen L. Ross, 2002. "Equilibria with Local Governments and Commuting: Income Sorting vs. Income Mixing," Working papers 2002-01, University of Connecticut, Department of Economics, revised Mar 2003.
  19. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  20. Murray, Sheila E & Evans, William N & Schwab, Robert M, 1998. "Education-Finance Reform and the Distribution of Education Resources," American Economic Review, American Economic Association, vol. 88(4), pages 789-812, September.
  21. Rosenthal, Stuart S. & Duca, John V. & Gabriel, Stuart A., 1991. "Credit rationing and the demand for owner-occupied housing," Journal of Urban Economics, Elsevier, vol. 30(1), pages 48-63, July.
  22. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
  23. Rosen, Harvey S., 1979. "Housing decisions and the U.S. income tax : An econometric analysis," Journal of Public Economics, Elsevier, vol. 11(1), pages 1-23, February.
  24. Thomas J. Nechyba, 2003. "Centralization, Fiscal Federalism, and Private School Attendance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 179-204, February.
  25. James M. Poterba, 1992. "Taxation and Housing: Old Questions, New Answers," NBER Working Papers 3963, National Bureau of Economic Research, Inc.
  26. Nechyba, Thomas J, 1999. " School Finance Induced Migration and Stratification Patterns: The Impact of Private School Vouchers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(1), pages 5-50.
  27. Benabou, Roland, 1993. "Workings of a City: Location, Education, and Production," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 619-52, August.
  28. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  29. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
  30. Jan K. Brueckner, 2004. "Fiscal Decentralization with Distortionary Taxation: Tiebout vs. Tax Competition," International Tax and Public Finance, Springer, vol. 11(2), pages 133-153, 03.
  31. Dorfman, Robert, 1976. "Vindication of a "Common Mistake" in Welfare Economics: Rejoinder," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1365-66, December.
  32. Goodspeed, Timothy J., 1995. "Local income taxation: An externality, Pigouvian solution, and public policies," Regional Science and Urban Economics, Elsevier, vol. 25(3), pages 279-296, June.
  33. Boadway, Robin, 1982. "On the Method of Taxation and the Provision of Local Public Goods: Comment," American Economic Review, American Economic Association, vol. 72(4), pages 846-51, September.
  34. DiPasquale, Denise, 1999. "Why Don't We Know More about Housing Supply?," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 9-23, January.
  35. Calabrese, Stephen & Epple, Dennis & Romano, Richard, 2007. "On the political economy of zoning," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 25-49, February.
  36. Epple, Dennis & Nechyba, Thomas, 2004. "Fiscal decentralization," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 55, pages 2423-2480 Elsevier.
  37. 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.
  38. Brueckner, Jan K., 1983. "Property value maximization and public sector efficiency," Journal of Urban Economics, Elsevier, vol. 14(1), pages 1-15, July.
  39. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
  40. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
  41. Epple, Dennis & Platt, Glenn J., 1998. "Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes," Journal of Urban Economics, Elsevier, vol. 43(1), pages 23-51, January.
  42. de Bartolome, Charles A M, 1990. "Equilibrium and Inefficiency in a Community Model with Peer Group Effects," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 110-33, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17251. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.