The Evolution of Governance Structures in a Polycentric System

HANDBOOK OF BEHAVIORAL ECONOMICS AND SMART DECISION-MAKING: Rational Decision-Making within the Bounds of Reason, Ed. Morris Altman, Forthcoming

30 Pages Posted: 31 Aug 2016

See all articles by Edward McPhail

Edward McPhail

Dickinson College - Department of Economics

Vlad Tarko

Dickinson College - Department of Economics

Date Written: August 26, 2016

Abstract

The Tiebout competition model is often criticized for its unrealistic assumptions. We develop an imperfect Tiebout competition model in which households have no information about other jurisdictions (moving decisions are blind), and local jurisdictions operate as revenue-maximizing Leviathans. We show that, even under such harsh assumptions, jurisdictions will not increase taxes without also increasing the quality of their public services. The model also opens the door for understanding various possible vicious spirals, e.g. as a result of factor prices shocks, co-production problems, and income-based sorting. We also show that, in general, the model does not lead to the calculus of consent optimum, which opens the possibility for conceptualizing which constitutional rules would tend to constrain the system to evolve towards optimum levels of centralization or decentralization across all public issues. Last but not least, because the model involves positive moving costs, we explain the origins of voice, as an alternative to exit. When people do not engage in exit, either because they still hold up hope that public services will improve or because they do not have the resources to move, they increase their involvement in other activities such as voice and co-production.

Keywords: Tiebout competition, polycentricity, endogenous quality, federalism, coproduction, heuristics

JEL Classification: H1, H2, H3, H4, D72

Suggested Citation

McPhail, Edward and Tarko, Vlad, The Evolution of Governance Structures in a Polycentric System (August 26, 2016). HANDBOOK OF BEHAVIORAL ECONOMICS AND SMART DECISION-MAKING: Rational Decision-Making within the Bounds of Reason, Ed. Morris Altman, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2830518

Edward McPhail

Dickinson College - Department of Economics ( email )

Room 120, Althouse Hall
Carlisle, PA 17013
United States

Vlad Tarko (Contact Author)

Dickinson College - Department of Economics ( email )

Room 120, Althouse Hall
Carlisle, PA 17013
United States

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