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Product Differentiation and Public Education

  • William H. Hoyt

    (University of Kentucky)

  • Richard A. Jensen

    (University of Kentucky)

Beginning with Tiebout (1956), numerous studies have argued that we should expect to see differences in public services among localities as a result of people "voting with their feet". Here, we consider differentiation in public services as a way of reducing competition among localities (cities). If cities finance their public services with a property tax that generates "tax competition", we find that adoption of quality differentiation in the public services will change the amount of services provided. If the cities maximize property values, this means a reduction in the level of public services provided for both the city that provides high quality as well as with low quality. The reduction in public services in both cities means that under certain conditions property values in both cities can increase. Thus in a two-stage game of adoption, we can observe quality differentiation in the services when the property tax is used. This is in sharp contrast to the case with a head tax in which we should never observe this type of differentiation. We believe quality differentiation might be particularly relevant to the provision of primary and secondary education. We argue that the extent of the differentiation in the quality and type of educational services provided among school districts might be in part a response to the detrimental effects of tax competition rather than entirely a "Tiebout- like" response to differences in tastes.

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Paper provided by EconWPA in its series Public Economics with number 9704001.

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Length: 29 pages
Date of creation: 08 Apr 1997
Date of revision:
Handle: RePEc:wpa:wuwppe:9704001
Note: Type of Document - Binary Word for Windows (V.6/7) document; prepared on IBM PC Compat.; to print on HP LaserJet; pages: 29 .
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  1. Krelove, R., 1993. "The persistence and inefficiency of property tax finance of local public expenditures," Journal of Public Economics, Elsevier, vol. 51(3), pages 415-435, July.
  2. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  3. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
  4. Sonstelie, Jon C. & Portney, Paul R., 1978. "Profit maximizing communities and the theory of local public expenditure," Journal of Urban Economics, Elsevier, vol. 5(2), pages 263-277, April.
  5. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  6. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  7. Burbidge, John B. & Myers, Gordon M., 1994. "Population mobility and capital tax competition," Regional Science and Urban Economics, Elsevier, vol. 24(4), pages 441-459, August.
  8. Jensen, Richard & Toma, Eugenia Froedge, 1991. "Debt in a model of tax competition," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 371-392, November.
  9. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  10. Wellisch, Dietmar, 1994. "Interregional spillovers in the presence of perfect and imperfect household mobility," Journal of Public Economics, Elsevier, vol. 55(2), pages 167-184, October.
  11. Henderson, J Vernon, 1985. "The Tiebout Model: Bring Back the Entrepreneurs," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 248-64, April.
  12. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  13. Oates, Wallace E, 1969. "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 957-71, Nov./Dec..
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