Abstract
In celebration of the centennial of the birth of Charles M. Tiebout, the current essay establishes the Tiebout hypothesis regarding jurisdictional composition as an origin of club theory and the study of local public goods. The Tiebout hypothesis and club theory constitute two of many foundational contributions to public choice. Tiebout’s voting-with-the-feet analysis exerts a lasting influence on empirical investigations in urban and regional economics regarding city size, regional composition, housing price capitalization, and migration patterns. The current paper displays three fundamental club models to establish an unmistakable linkage between the Tiebout hypothesis and club theory. Given that linkage, the paper also identifies essential differences between the two analyses. Myriad applications of club theory to virtually all fields of economics highlight Tiebout’s far-reaching legacy.
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Notes
Given nonexcludable benefits, consumers have no motivation to reveal their true preferences for a public good, thereby taking a free ride. Additionally, nonrival benefits of a pure public good mean that practicing exclusion is not optimal because there is zero marginal cost of extended consumption to another person (Cornes and Sandler 1996).
The matching of public good benefit and political jurisdictional domains results in the notion of fiscal equivalence (Olson 1969), which is independent of the Tiebout hypothesis and determines the different levels of government.
In an interesting article, Boettke and Marciano (2017) argue that Buchanan did not consider the Tiebout analysis as a forerunner of club theory because Buchanan viewed jurisdictional mobility as having negative welfare consequences, namely residents of poor jurisdictions will move to rich ones, resulting in mixed-taste jurisdictions with the original rich residents paying for the poor entrants. This view ignores the tax-internalizing entrant fee.
Public choice includes the study of committees, political competition among parties, the theory of voting, the study of lobbying, economic theory of democracy, and other applications of economics methods to political science.
An inclusive group involves the joint consumption of a pure public good for which the absence of benefit rivalry or crowding means that the group can include everyone (Olson 1965).
Olson (1965) never uses the term, club.
See Sandler (2013) on the workings of the Buchanan clubs models. The absence of a camaraderie threshold does not have an essential effect on club theory.
The FOCs for an interior solution consist of four equations: \(U_{y}^{i} - \lambda F_{y}^{i} = 0\); \(U_{X}^{i} - \lambda F_{X}^{i} = 0\); \(U_{s}^{i} - \lambda F_{s}^{i} = 0\); and \(F^{i} \left( {y^{i} ,X,s} \right) = 0\) with \(\lambda\) as the Lagrange multiplier associated with the resource constraint. Taking the two appropriate ratios of the first three FOCs yields conditions (3) and (4).
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Acknowledgements
The author profited from helpful comments by two anonymous reviewers, Steven Craig, and Eric John Heikkila on an earlier draft.
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