The Effect of Spillovers and Congestion on the Endogenous Formation of Jurisdictions

Abstract

This paper analyzes the effect of interjurisdictional spillovers and congestion of local public services on the segregative properties of endogenous formation of jurisdictions. Households choosing to live at the same place form a jurisdiction which produces congested local public services, which generates positive spillovers to other jurisdictions. In every jurisdiction, the production of the local public services is financed through a local tax based on households' wealth. Local wealth tax rates are democratically determined in every jurisdiction. Households consume the available amount of public services in their jurisdiction and a composite private good. Any household is free to leave its jurisdiction for another that would increase its utility. A necessary and sufficient condition to have every stable jurisdiction structure segregated by wealth is identified: the public services must be either a gross substitute or a gross complement to the private good.

The welfare costs of Tiebout sorting with true public goods

“…The 'neighborhood' parameter ν ∈ [0, 1] is a parameter that measures the degree to which households from outside municipality j have access to consume the publicly provided good in j. While σ measures the degree to which a public good 'spills out' of a region (e.g., in the form of water quality), ν measures the degree 9 Our equations (1) and (2) representing the production and consumption levels of the publicly provided good have been inspired by Oddou (2016). The definitions of production G j and consumption g j imply that these variables have different units: While G j is equal to aggregate production in j and therefore measured in units of the publicly provided good, consumption g j describes the amount that every household in j can consume and is therefore measured in units of the publicly provided good per household.…”

“…We treat the number of municipalities as given, considering the stylized fact that most jurisdictional borders are have a long history of existence and will not be changed due to economic outcomes alone. We describe the equilibria numerically and carry out a normative analysis of the costs of decentralization, which is not done by Nechyba (1997) and Oddou (2016). In this sense, our paper is a complement to their earlier work.…”

“…due to mitigating information asymmetries and rent-seeking (as in Sato 2003), and from an endogenous formation of jurisdictions, which is the focus in Gravel & Thoron (2007), Gravel & Oddou (2014) and Oddou (2016). 5 In the theory section, we derive the equilibrium conditions of the model and characterize the fiscal externality that results from the decentralized locational choice (defined as the "jurisdictional choice externality", or JCE, by Calabrese et al 2012).…”

“…With two exceptions, the public good modeled is a publicly provided private good (usually interpreted as school quality) that is perfectly rival and excludable. To our knowledge, the only previous sorting models that include residence-based nonbenefit taxes and truly public goods are by Nechyba (1997) and Oddou (2016). These papers focus on the existence of equilibria and on the endogenous formation of jurisdictions, from which we abstract.…”

Spillover Effects in a Federal Country with Vertical Tax Externalities

“…6 More recently, Gregor and Stastna (2012) compare centralization versus decentralization when tastes are homogenous across jurisdictions and local public spending for local inputs generates a positive spillover in the other jurisdiction where it is a complement to domestic expenditure. 7 Oddou (2016) analyzes how interjurisdictional spillovers and congestion of local public goods affect the communities structure in terms of segregation.…”