NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Stephen Calabrese, Dennis N. Epple, Richard Romano

NBER Working Paper No. 17251
Issued in July 2011
NBER Program(s):   PE

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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Document Object Identifier (DOI): 10.3386/w17251

Published: 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. citation courtesy of

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