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The Tiebout Hypothesis; Near-Optimality in Local Public Good Economies (pdf, ps)

Myrna Wooders; Econometrica, Vol. 48, No. 6. (Sep., 1980), pp. 1467-1485.

Abstract

Over two decades ago, Charles Tiebout conjectured that in economies with local public goods, consumers "vote with their feet" and that this "voting" creates an approximate "market-type" equilibrium. He hypothesized that this approximate equilibriumis "nearly" optimal and, the smaller the moving costs, the closer the equilibrium is to an optimum. This paper provides a formal model of an economy with a local public good and endogenous jurisdiction structures (partitions ofthe set of agents into jurisdictions) which permits proofs of Tiebout's conjectures. Analogues of classical results pertaining to private-good economies, such as existence of equilibrium and convergence of the core to equilibrium states of the economy, are obtained for the approximate equilibrium and approximate cores.

Comment, July 2001

In this paper, prices are described informally as "Lindahl". Indeed, in equilibrium the prices defined equal (that is, are the same numbers) as Lindahl prices, givenequal sharing of profits by all member of each jurisdiction. The reader will see, however, that the per unit price for public good depends only on the numbers of players in a jurisdiction and not on the type of the player. Thus, the prices are anonymous.

Another comment: June 2004. A few readers have wondered about the relationship of this paper to subseqent research and in particular a 1980 typescript. The typescript) and a 1979 paper allow nonanonymous or differentiated crowding -- for example, individuals may care not only about the numbers of individuals in their coalition/club/jurisdiction but also about their types. (Parts of the research in both these papers underlies a 1982 Cowles Foundation Discussion Paper with Martin Shubik. A number of papers published in journals and volumes also use this research -- cf. this or that.) With nonanonymous crowding, individuals who have quite different demands for public goods and congestion, for example, may neverthess want to live together in the same jurisdiction. Marriage models are special cases of nonanonymous crowding.

Keywords

Tiebout economies, clubs, external effects,strict small group effectiveness, taste-homogeneity, core, equilibrium, jurisdiction formation.