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More Complications to the Tiebout Model

December 17, 2012

The Tiebout model proposes that because entry and exit out of commuter towns are relatively easy, we should expect a competitive market in local governance. If, like Gerard Depardieu, you don’t like what you’re getting, you flee somewhere more amenable. Each town offers a bundle of goods–schools, street cleaning, parks, police–and each bundle has a price collected as taxes. And because people desire these goods in different degrees, we see, as the communities sort themselves out, a difference in the quantity and quality of amenities any town provides.

Bryan Caplan started things off recently by highlighting some absurd conclusions of the model: it implies local governments will not redistribute wealth from one population segment to another (and yet we see that it does) and it suggests we should see little waste in the provision of these local goods (and yet we know how our public schools are run).

Arnold Kling followed up with some more difficulties for the theory: exit is not frictionless and the bundling of local goods helps to pile on lots of pork.

David Friedman added a note for Bryan’s post:

What’s wrong with [the model] is that land can’t move. If the local government engages in exploitative taxation, pocketing the money, people move out. As they move out, land values fall. They stop moving when the drop in land value just balances the cost of the exploitative taxation. The implication, if the rulers are smart, is that they will produce an efficient bundle of services, but tax away the land value and pocket it.

One more point I’ll add to Arnold’s thought. Our friends and the networks we create take time to develop. As a child, I hated moving to a new school because it meant I lost my friends and had to make new ones. The same effect holds for growing networks in an industry. For example, there’s some evidence that startups located in a founders’s home region outperform those started in unfamiliar places. In addition, we come to grow attached to the businesses and vendors in a neighborhood. Routines enable trust. And so, whenever we move communities, we also lose the Hayekian local knowledge about where we live, all the little tricks such as what roads to run on and where to find parking places at the train station. Sure, all these difficulties can be overcome, but the pebble problems add to the burden of exit.

Patri’s P.S.  Also see Bryan’s paper “Standing Tiebout on his Head” (linked at the end of his essay), and my response: Seasteading, Tiebout, and Federalism: Seasteading FTW

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