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Background |
Charles Tiebout (pronounced TEE-bow) received his education
at a time when the supremacy of centralized government was at
a peak both politically and intellectually. He earned his
Ph.D. in economics from the University of Michigan. His 1957
dissertation about regional multipliers, however, had nothing
to do with local public finance where he would make his
largest contributions. As an instructor at Northwestern
University, he published his seminal article, "A Pure Theory
of Local Public Expenditures," (Journal of Political Economy,
64: 416-24) in 1956. From there he went on to teach economics
at UCLA and then geography at the University of Washington.
Tiebout stayed in Seattle until his early death in 1962 at the
age of 43. He published and consulted in regional economic
development, but his primary contribution and best-known work
developed what is now known as the "Tiebout
Hypothesis." |
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Innovation |
The title of Tiebout's most famous article, "A Pure Theory
of Local Public Expenditures," is a direct play on Paul
Samuelson's famous 1954 article, "The Pure Theory of Public
Expenditures". Samuelson and other economists had analyzed the
"free rider problem" that governments face when they provide
goods and services. If no one can be excluded from consuming
these public goods, individuals do not have an incentive to
reveal their preferences for them. Everyone has an incentive
to understate their true preferences to reduce their own tax
burden, while still hoping to be able to enjoy the public good
supplied by others. Markets therefore fail to provide public
goods efficiently, and some form of government intervention is
needed.
Tiebout's key insight was that this problem is different
when local governments provide goods to citizens who can move
among distinct communities. If citizens are faced with an
array of communities that offer different types or levels of
public goods and services, then each citizen will choose the
community that best satisfies his or her own particular
demands. Individuals effectively reveal their preferences by
"voting with their feet." Citizens with high demands for
public goods will concentrate themselves in communities with
high levels of public services and high taxes, while those
with low demands will choose other communities with low levels
of public services and low taxes. Competition among
jurisdictions results in homogeneous communities, with
residents that all value public services similarly. In
equilibrium, no individual can be made better off by moving,
and the market is efficient. It does not require a political
solution to provide the optimal level of public goods.
In addition to perfect residential mobility, Tiebout's
model assumes that there are no spillovers of benefits across
communities, and that costs increase as additional people
receive services. These conditions do not make local
governments efficient providers of pure public goods like
national defense. However, they do imply that local
governments can efficiently provide what are essentially
private goods like education and garbage collecting. Tiebout
noted that at the time about half of all government services
fell into the domain of local governments and were then
subject to this type of analysis. In contrast to the
prevailing assumption that government would often provide
inefficient levels of public goods, Tiebout showed that these
decentralized systems act just as regular markets.
Tiebout's paper was a purely theoretical piece, but it has
had wide empirical application. A long literature in local
public finance has built on his insights about community
choice to estimate demands for local public goods like
education, sanitation, and fire protection, and to study how
property values reflect area taxes and services. Others have
built on his model to explain why zoning laws are such a
pervasive tool of urban and regional governments, as
communities attempt to prevent free riding by citizens who buy
small homes in communities with high property wealth and low
tax rates. More broadly, Tiebout's insights have had a large
impact on debates about fiscal federalism and the proper roles
of central, regional, and local governments. |