The welfare costs of Tiebout sorting with true public goods
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We develop a model of Tiebout sorting based on decentralized income taxation, which allows for spillovers and imperfect rivalry in consumption of the publicly provided good. We identify three sources of welfare loss from decentralization: imperfect redistribution, interjurisdictional free-riding, and inefficient residential choice. Whereas the welfare loss from imperfect redistribution decreases and that from free-riding rises unambiguously as the publicly provided good becomes more pure, the welfare loss from the inefficient residential choice depends non-monotonically on spillovers and rivalry. The equilibrium can be characterized by relative crowding of either the rich or the poor municipality. Our results imply that the characteristics of the publicly provided good are an important determinant for the welfare costs of decentralization.
KeywordsPublic goods Tiebout Local income taxation Fiscal federalism Decentralization Free-riding
JEL ClassificationH21 H23 H41 H77 Q58 R13 R23 R50
We are grateful for valuable comments by two anonymous referees. We also thank Kurt Schmidheiny, who provided valuable inputs. Earlier versions of this work have been presented at the ZEW Public Finance Conference 2015 in Mannheim, the EAERE conference 2015 in Helsinki, the IIPF conference 2015 in Dublin, the SSES conference 2018 in St. Gallen and at MCC Berlin. We thank the discussants and the participants for useful comments and suggestions. Any remaining errors are our own.
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