This Town Ain't Big Enough? Quantifying Local Public Goods Spillovers

Despite long-standing theoretical interest, empirical attempts at investigating the appropriate level of decentralization remain scarce. This paper develops a simple and flexible framework to test for the presence of public good spillovers between fiscally autonomous jurisdictions and investigate potential welfare gains from marginal fiscal integration. We build a quantitative spatial equilibrium model of cities with mobile households and endogenous local public goods causingspillovers across jurisdictional boundaries. We show how one can exploit migration and house priceresponses to shocks in local public goods at different geographic scales to reveal the intensity ofspillovers. Applying our framework to the particularly fragmented French institutional setting, westructurally estimate the model using a unique combination of administrative panel datasets on cities. Estimation relies on plausibly exogenous variations in government subsidies to instrument changes in the supply of local public goods. We find that public goods of neighboring cities account for approximately 89-96% of total public goods benefiting residents of the average French city. Finally, we simulate the effect of a reform increasing fiscal integration and find substantial welfare gains.