Inefficiencies From Metropolitan Political And Fiscal Decentralization: Failures Of Tiebout Competition

The authors 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. They characterize the first-best allocation and show efficiency can be implemented with decentralization using head taxes. They 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.