Advertisement

Economic Theory

, Volume 67, Issue 1, pp 1–27 | Cite as

Capitalization, decentralization, and intergenerational spillovers in a Tiebout economy with a durable public good

  • John P. ConleyEmail author
  • Robert Driskill
  • Ping Wang
Research Article
  • 98 Downloads

Abstract

We consider an overlapping generations model with a durable local public good (DLPG). We establish a Tiebout theorem (equilibrium exists and is first best) as well as an equal treatment Second Welfare Theorem in this dynamic DLPG economy. We establish conditions, including the Small Jurisdiction assumption, under which local provision of durable public goods results in the full internalization of the intergenerational spillovers that durability entails. In contrast, when durable public goods are provided by the national government, internalization does not take place and underprovision of public goods results. This sets up an institutional trade-off between national and local provision of public goods that balances the relative strength of intergenerational and interjurisdictional spillovers. Our main conclusion is that while capitalization is an effective mechanism to cause agents to internalize intergenerational spillovers, the effectiveness of this mechanism is limited by the degree to which there are more general spillovers across jurisdictions.

Keywords

Durable local public goods Capitalization and intergenerational spillover effects Dynamic Tiebout Equilibrium Welfare analysis 

JEL Classification:

H4 D9 H0 D7 

Notes

Acknowledgements

We would like to thank Marcus Berliant, Hideo Konishi, Tom Nechyba, Antonio Rangel, Robert Rosenthal, Steve Tadelis, anonymous referees, an associate editor, and an editor. We are also grateful to participants of the Public Economic Theory Meetings, the Midwest Economic Theory Meetings, and the National Tax Conferences for useful discussions. Needless to say, the usual disclaimer applies.

Supplementary material

199_2017_1094_MOESM1_ESM.pdf (140 kb)
Supplementary material 1 (pdf 139 KB)

References

  1. Balasko, Y., Shell, K.: The overlapping-generations model, I: the case of pure exchange without money. J. Econ. Theory 23, 281–306 (1980)CrossRefGoogle Scholar
  2. Benabou, R.: Equity and efficiency in human capital investment: the local connection. Rev. Econ. Stud. 63, 237–264 (1996)CrossRefGoogle Scholar
  3. Berglas, E.: Distribution of tastes and skills and the provision of local public goods. J. Pub. Econ. 6, 409–423 (1976)CrossRefGoogle Scholar
  4. Bergstrom, T., Cornes, R.: Independence of allocative efficiency from distribution in the theory of public goods. Econometrica 51, 1753–1765 (1983)CrossRefGoogle Scholar
  5. Bewley, T.: A critique of Tiebout’s theory of local public expenditure. Econometrica 49, 713–740 (1981)CrossRefGoogle Scholar
  6. Black, S.: Do better schools matter? Parental valuation of elementary education. Q. J. Econ. 114, 577–599 (1999)CrossRefGoogle Scholar
  7. Boldrin, M., Montes, A.: The intergenerational state education and pensions. Rev. Econ. Stud. 72, 651–664 (2005)CrossRefGoogle Scholar
  8. Brueckner, J.: A test for allocative efficiency in the local public sector. J. Pub. Econ. 19, 311–331 (1982)CrossRefGoogle Scholar
  9. Brueckner, J., Soo, M.: Voting with capitalization. Reg. Sci. Urb. Econ. 21, 453–467 (1991)CrossRefGoogle Scholar
  10. Brueckner, J.: Fiscal federalism and capital accumulation. Mimeo, New York City (1997)Google Scholar
  11. Brueckner, J., Wingler, T.: Public intermediate inputs, property values, and allocative efficiency. Econ. Lett. 14, 245–250 (1984)CrossRefGoogle Scholar
  12. Buchanan, J.: An economic theory of clubs. Economica 32, 1–14 (1965)CrossRefGoogle Scholar
  13. Cass, D., Shell, K.: Do sunspots matter? J. Polit. Econ. 91, 193–227 (1983)CrossRefGoogle Scholar
  14. Chen, B., Peng, S., Wang, P.: Intergenerational human capital evolution, local public good preferences, and stratification. J. Econ. Dyn. Control 33, 745–757 (2009)CrossRefGoogle Scholar
  15. Conley, J., H Konishi, H.: On the existence of asymptotically efficient Migration-proof Equilibria. J. Pub. Econ. 2, 243–262 (1999)Google Scholar
  16. Conley, J., Rangel, A.: An intergenerational view of land taxes and Decentralization. NBER Working Paper # 8394 (2001)Google Scholar
  17. Conley, J., Wooders, M.: Anonymous pricing in public goods economies. In: Pines, D., Sadka, E., Zilcha, I. (eds.) Topics in Public Economics, pp. 89–120. Cambridge University Press, Cambridge (1998)Google Scholar
  18. Conley, J., Wooders, M.: Tiebout economies with differential genetic types and endogenously chosen crowding characteristics. J. Econ. Theory 98, 261–294 (2001)CrossRefGoogle Scholar
  19. Cornes, R., Sandler, T.: The theory of externalities, public goods and club goods, 2nd edn. Cambridge University Press, Cambridge (1996)CrossRefGoogle Scholar
  20. de Bartolome, C.: Equilibrium and inefficiency in a community model with peer group effects. J. Polit. Econ. 99, 110–133 (1990)Google Scholar
  21. Davis, O.A., Whinston, A.B.: On the distinction between public and private goods. Am. Econ. Rev. 57, 360–73 (1967)Google Scholar
  22. DeSerpa, A.C.: A theory of discriminatory clubs? Scott. J. Polit. Econ. 24, 33–41 (1977)CrossRefGoogle Scholar
  23. Debreu, G.: Smooth preferences. Econometrica 4, 603–615 (1972)CrossRefGoogle Scholar
  24. Dunz, K.: Existence of equilibrium with local public goods and houses. SUNY-Albany Department of Economics Discussion Paper #201 (1985)Google Scholar
  25. Epple, D., Zelenitz, A., Visscher, M.: A search for testable implications of the Tiebout hypothesis. J. Polit. Econ. 86, 405–425 (1978)CrossRefGoogle Scholar
  26. Epple, D., Filimon, R., Romer, T.: Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice. J. Pub. Econ. 24, 281–308 (1984)CrossRefGoogle Scholar
  27. Epple, D., Romano, R., Sieg, H.: The intergenerational conflict over the provision of public education. J. Pub. Econ. 96, 255–268 (2012)CrossRefGoogle Scholar
  28. Fujita, M.: Urban Econonomics Theory. Cambridge University Press, Cambridge (1989)CrossRefGoogle Scholar
  29. Geanakoplos, J.: Overlapping generations models of general equilibrium. Yale University Cowles Foundation Discussion Paper #1663 (2008)Google Scholar
  30. Glaeser, E.: The incentive effects of property taxes on local governments. Pub. Choice 89, 93–111 (1996)CrossRefGoogle Scholar
  31. Glomm, G.: A model of growth and migration. Can. J. Econ. 25, 901–922 (1992)CrossRefGoogle Scholar
  32. Glomm, G., Lagunoff, R.: A dynamic Tiebout theory of voluntary versus involuntary provision of public goods. Rev. Econ. Stud. 66, 659–667 (1999)CrossRefGoogle Scholar
  33. Hanushek, E.: The economics of schooling production and efficiency in public schools. J. Econ. Lit. 24, 141–176 (1986)Google Scholar
  34. Hatfield, J.: Federalism, tax base restrictions, and the provision of intergenerational public goods. University of Texas at Austin working paper (2014)Google Scholar
  35. Hatfield, J.: Backward intergenerational goods and endogenous fertility. J. Pub. Econ. Theory 10, 765–784 (2008)CrossRefGoogle Scholar
  36. Hayes, K., Taylor, L.: Neighborhood school characteristics: what signals quality to home buyers. Econ. Rev. Fed. Res. Bank Dallas Fourth Quart. 1996, 2–9 (1996)Google Scholar
  37. Konishi, H.: Voting with ballots and feet: existence of equilibrium in a local public good economy. J. Econ. Theory 68, 480–509 (1996)CrossRefGoogle Scholar
  38. Kotlikoff, L., Persson, T., Svensson, L.: Social contracts as assets: a possible solution to the time consistency problem. Am. Econ. Rev. 4, 662–677 (1988)Google Scholar
  39. Kotlikoff, L., Raffelhueschen, B.: How regional differences in taxes and public goods distort life cycle location choices. NBER Working Paper #3598 (1991)Google Scholar
  40. Kotlikoff, L., Rosenthal, R.: Some implications of generational politics and exchange. Econ. Polit. 5, 27–42 (1993)CrossRefGoogle Scholar
  41. McGuire, M.: Group segregation and optimal jurisdictions. J. Polit. Econ. 82, 112–132 (1974)CrossRefGoogle Scholar
  42. McCallum, B.: The role of overlapping-generations models in monetary economics. Carnegie-Rochester Conf. Ser. Pub. Policy 18, 9–44 (1983)CrossRefGoogle Scholar
  43. Nechyba, T.: Existence of equilibrium and stratification in local and hierarchical Tiebout economies with property taxes and voting. Econ. Theory 10, 277–304 (1996)CrossRefGoogle Scholar
  44. Negishi, T.: Welfare economics and the existence of an equilibrium for a competitive economy. Metroeconomica 12, 92–97 (1960)CrossRefGoogle Scholar
  45. Ng, Y.K., Tollison, R.D.: A note on consumption sharing and non-exclusion rules. Economica 41, 446–50 (1974)CrossRefGoogle Scholar
  46. Nguyen-Hoang, P., Yinger, J.: The capitalization of school quality into house values: a review. J. Hous. Econ. 20, 30–48 (2011)CrossRefGoogle Scholar
  47. Oates, W.: The effects of property taxes and local public spending on property values: an empirical study of tax capitalization and the Tiebout hypothesis. J. Polit. Econ. 77, 994–1003 (1969)CrossRefGoogle Scholar
  48. Pauly, M.: Clubs, commonality, and the core: an integration of game theory and the theory of public goods. Economica 34, 314–24 (1967)CrossRefGoogle Scholar
  49. Pauly, M.: Cores and clubs. Pub. Choice 9, 53–65 (1970)CrossRefGoogle Scholar
  50. Rangel, A.: Forward and backward generational goods: why is social security good for the environment? Am. Econ. Rev. 93, 813–834 (2003)CrossRefGoogle Scholar
  51. Rangel, A.: How to protect future generations using tax-base restrictions. Am. Econ. Rev. 95, 314–346 (2005)CrossRefGoogle Scholar
  52. Rose-Ackerman, S.: Market of models of local government, exit, voting and the land market. J. Urb. Econ. 6, 319–337 (1979)CrossRefGoogle Scholar
  53. Shell, K.: Notes on the economics of infinity. J. Polit. Econ. 79, 1002–1011 (1971)CrossRefGoogle Scholar
  54. Sprunger, P., Wilson, D.: Imperfectly mobile households and durable local public goods: does the capitalization mechanism work? J. Urb. Econ. 44, 468–492 (1998)CrossRefGoogle Scholar
  55. Schultz, C., Sjöström, T.: Local public goods, debt and migration. J. Pub. Econ. 80, 313–337 (2001)CrossRefGoogle Scholar
  56. Schultz, C., Sjöström, T.: Public debt, migration, and shortsighted politicians. J. Pub. Econ. Theory 6, 655–674 (2004)CrossRefGoogle Scholar
  57. Starrett, D.: Mobility and capitalization in local public finance: a reassessment. Mimeo, New York City (1997)Google Scholar
  58. Stiglitz, J.: The theory of local public goods twenty-five years after Tiebout: a perspective. NBER Working Paper #954 (1982)Google Scholar
  59. Tiebout, C.: A pure theory of local expenditures. J. Polit. Econ. 64, 416–424 (1956)CrossRefGoogle Scholar
  60. Tollison, R.D.: Consumption sharing and non-exclusion rules. Economica 39, 279–91 (1972)CrossRefGoogle Scholar
  61. Westhoff, F.: Existence of equilibrium in economies with a local public good. J. Econ. Theory 14, 84–112 (1977)CrossRefGoogle Scholar
  62. Wildasin, D.: Local public goods, property values, and local public choice. J. Urb. Econ. 8, 521–534 (1979)CrossRefGoogle Scholar
  63. Wildasin, D., Wilson, J.: Imperfect mobility and local government behavior in an overlapping-generations model. J. Pub. Econ. 60, 177–198 (1996)CrossRefGoogle Scholar
  64. Wildasin, D., Wilson, J.: Risky local tax bases: risk-pooling vs. rent-capture. J. Pub. Econ. 69, 229–247 (1998)CrossRefGoogle Scholar
  65. Wang, P.: Money, transaction structure and spatial economics, Ph.D. Dissertation, University of Rochester (1987)Google Scholar
  66. Wang, P.: Money, competitive efficiency and intergenerational transactions. J. Monet. Econ. 32, 303–320 (1993)CrossRefGoogle Scholar
  67. Wooders, M.: Equilibria, the core, and jurisdiction structures in economies with a local public good. J. Econ Theory 18, 328–348 (1978)CrossRefGoogle Scholar
  68. Yinger, J.: Capitalization and the theory of local public finance. J. Polit. Econ. 90, 917–943 (1982)CrossRefGoogle Scholar
  69. Yinger, J.: Capitalization and sorting: a revision. Pub. Fin. Q. 23, 217–225 (1995)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of EconomicsVanderbilt UniversityNashvilleUSA
  2. 2.Washington University in St. LouisSt. LouisUSA
  3. 3.NBERCambridgeUSA

Personalised recommendations