Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition

46 Pages Posted: 29 Jul 2011 Last revised: 20 Feb 2022

See all articles by Stephen Calabrese

Stephen Calabrese

University of South Florida - Department of Government and International Affairs; Carnegie Mellon University - David A. Tepper School of Business

Dennis Epple

Carnegie Mellon University; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Richard E. Romano

University of Florida - Warrington College of Business Administration - Department of Economics

Date Written: July 2011

Abstract

We examine the welfare effects of provision of local public goods in an empirically relevant setting using a multi-community model with mobile and heterogeneous households, and with flexible housing supplies. We characterize the first-best allocation and show efficiency can be implemented with decentralization using head taxes. We calibrate the model and compare welfare in property-tax equilibria, both decentralized and centralized, to the efficient allocation. Inefficiencies with decentralization and property taxation are large, dissipating most if not all the potential welfare gains that efficient decentralization could achieve. In property tax equilibrium centralization is frequently more efficient! An externality in community choice underlies the failure to achieve efficiency with decentralization and property taxes: Poorer households crowd richer communities and free ride by consuming relatively little housing thereby avoiding taxes.

Suggested Citation

Calabrese, Stephen and Epple, Dennis and Romano, Richard E., Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition (July 2011). NBER Working Paper No. w17251, Available at SSRN: https://ssrn.com/abstract=1898507

Stephen Calabrese (Contact Author)

University of South Florida - Department of Government and International Affairs ( email )

Tampa, FL 33620
United States

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Dennis Epple

Carnegie Mellon University ( email )

Tepper School of Business
Pittsburgh, PA 15213-3890
United States
412-268-1536 (Phone)
412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Richard E. Romano

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

Gainesville, FL 32611-7140
United States
(352) 392-4812 (Phone)

HOME PAGE: http://www.cba.ufl.edu/faculty/facultyinfo.asp?WEBID=321

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