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

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.     

Public Good Mix in a Federation with Incomplete Information

We analyze a model of resource allocation in a federal system in which the center transfers real resources between member states. The center is assumed to be unable to observe the precise value of the cost differences across jurisdictions that motivate the transfers. Moreover, the center cannot observe the output levels of the individual local public goods provided by the jurisdictions, but must condition its transfers on a coarse aggregate of expenditures on public goods. We find that when the jurisdiction with private information realizes a high unit cost, it is generally worthwhile for the center to allow it a level of expenditure on public goods that differs from the "first best" level. However, whether that level is higher or lower than its first best level depends on the magnitudes of demand parameters for the local public good.     

Does endogenous formation of jurisdictions lead to wealth-stratification?

Conditions under which endogenous processes of jurisdiction formation entail wealth-stratification are examined in a model where unequally wealthy households with identical preferences form jurisdictions in order to produce a public good financed by proportional taxation. We define a stable jurisdiction structure to be a partition of the households into jurisdictions that is immune to individual deviations. We define a jurisdiction structure to be wealth-stratified when each jurisdiction is composed of households who form an interval with respect to the ordering of their wealth. We show that a necessary and sufficient condition for the stratification of any stable jurisdiction structure is for the individual preferences for the public and the private good to exhibit a relation of gross substitutability/complementarity between the public good and the private good that is independent from prices and wealth.     

The effect of a progressive taxation scheme on the endogenous formation of jurisdictions

This paper analyzes the effect of a progressive taxation scheme on the segregative properties of the endogenous formation of jurisdictions. Households living in the same place form a jurisdiction which aims to produce a local public good and implement a redistribution policy by granting every household a demogrant of an amount determined by the jurisdiction. In every jurisdiction, production of local public services and the demogrant are financed with a local tax based upon the households wealth. Local wealth tax rates and the level of the demogrant are exogenously determined in every jurisdiction. Households are free to leave their jurisdiction for another jurisdiction that would provide them with their highest utility. We found that the existence of a demogrant seems to mitigate the segregative properties of endogenous jurisdiction formation, because the condition identified by Gravel and Thoron to ensure segregation of any stable jurisdiction structure remains necessary, but is no longer sufficient.     

Tiebout with Politics: Capital Tax Competition and Constitutional Choices

This paper examines how capital tax competition affects jurisdiction formation. We describe a non-cooperative locational model of public goods provision choices, where the levels of taxation and the local public good varieties provided within jurisdictions are selected by majority voting, and where equilibrium jurisdictions consist of consumers with similar tastes. We show that interjurisdictional tax competition results in an enlargement of jurisdictional boundaries, and, even in the absence of intrajurisdictional transfers, can raise welfare for all members of a jurisdiction.     

The progressivity of equalization payments in federations

We investigate the conditions under which an inequality averse and additively separable welfarist central government would choose to set up a progressive equalization payments scheme in a federation with local public goods. A progressive equalization payments scheme is a list of per capita net (possibly negative) subsidies – one such net subsidy for every jurisdiction – that are decreasing with respect to jurisdictions per capita wealth. We examine this question in a setting where the case for progressivity is a priori the strongest, namely: all citizens have the same utility function, inhabitants of a given jurisdiction have the same wealth and are not able to move across jurisdictions and there is no cross-jurisdiction competition in the setting of tax rates. We show that the central government favors a progressive equalization payments scheme for all distributions of wealth and population sizes if and only if its objective function is additively separable between each jurisdiction's per capita wealth and number of inhabitants. When interpreted for a mean of order r social welfare function, and assuming the absence of congestion in the local public good, this condition is shown to be equivalent to the requirement that the individual indirect utility function be additively separable between wealth public good price and be raised at the power 1/r before its agregation by means of the mean-of-order r social welfare function. Some implications of this restriction to the case where the individual's direct utility function is additively separable are also derived.     

Regulation of Investments in Infrastructure: The Interplay between Strategic Behaviors and Initial Endowments

This paper explores the dynamic properties of price‐based policies in a model of competition between two jurisdictions. Jurisdictions invest over time in infrastructure to increase the quality of the environment, a global public good. They are identical in all respects but one: initial stocks of infrastructure. This is a dynamic type of heterogeneity that disappears in the long run. Therefore, at the steady state, usual intuitions from static settings apply: identical jurisdictions inefficiently underinvest, calling for public subsidies. In the short run, however, counterintuitive properties are established: (i) the evolution of capital stocks can be nonmonotonic and (ii) one jurisdiction can be temporarily taxed, even though it should increase its investment, whereas the other is subsidized. It is shown how these phenomena are related to initial conditions and the kind of interactions between infrastructure capitals, complementarity or substitutability.     

Cross-border pollution abatement and its synergy

The present study shows that in the case of cross-border pollution between two neighbouring jurisdictions, residents in each jurisdiction should undertake a competitive pollution abatement program. The present study considers an economy comprising two homogeneous regions, with each regional government competing to provide some local public good that can benefit not only the regions supplying them but also the other neighbouring regions. This study investigated the circumstances under which such regional spillovers mutually arise by comparing cases without spillover effects with those featuring varying levels of spillovers. The study result indicates that regions exhibiting a different levels of spillover provide higher welfare measures than those without spillover and that the higher the level of spillover the greater the social welfare measures yielded. The study also compares cases without synergy effects with those featuring varying levels of spillover.     

Tiebout equilibria in local public good economies with spillovers

This paper analyzes the effects of spillovers on the equilibrium population distribution across jurisdictions in a local public good economy with free mobility. Spillovers are parametrized by a matrix [α_ij] where α_ij ∈ [0, 1]. When spillovers are symmetric and close to 0 or 1 (pure local public goods and pure public goods), all equilibrium jurisdiction structures are symmetric. However, any population distribution can be sustained in equilibrium for some value of the spillover parameter α. In the class of utility functions with additive externalities, we identify the unique family of utility functions for which equilibria are symmetric except for an isolated value of α. This is a class of utility functions which are linear in the public good and a power function of the private good, u(c, γ) = − A(1 − c)^β + γ. With this specification of utility, we show that an increase in α results in a more fragmented equilibrium population distribution, and that when spillovers are asymmetric and large, a jurisdiction which is more centrally located (i.e. benefits more from the public goods provided in other jurisdictions) has a larger population in equilibrium.     

Political Support for Tax Decentralization

We present a spatial model of a city with two unequally productive jurisdictions. City residents bear a commuting cost to work in either of the two jurisdictions. Each jurisdiction must finance a public budget with a wage and a head tax. We compare the first best optimum to tax decentralization. From the total welfare viewpoint, tax competition is always inefficient. However, majoritarian local governments may prefer the inefficient tax decentralization to the first best.     

Human Fallibility, Complementarity, and Fiscal Decentralization

This paper examines economic growth properties under alternative fiscal organizations when a bureau's decisions are fallible. A country consists of J jurisdictions, which need a public service. In a centralized government, one authority decides on services in every jurisdiction. In a decentralized government, J authorities are in charge of each public service. An authority can have high ability or low ability, and an authority with high ability draws a good project with higher probability. We first show that the decentralized government provides the same average quality of public services, with lower variance, than does the centralized government. We then apply this result to an economic growth model where the value of the Solow residual is a constant elasticity of substitution (CES) function of public services. We show that there is a critical value of the degree of complementarity below which fiscal decentralization is more desirable than fiscal centralization for an expected economic growth, and the decentralized government has a lower variance of GDP growth.     

Land rents,optimal taxation and local fiscal independence in an economy with local public goods

A general equilibrium model of an economy with cities, farms and free migration of population is constructed. The cities produce internationally traded goods via production functions subject to economies of scale. They also produce housing and a local public good. Two areas are defined to be disjoint if households performing an economic activity in one area are not operating in the other. An area is exclusive if it is disjoint to its complement. The economic surplus of an area is then defined to be the value of the area's net export of goods and resources. Local efficiency of an area is defined to be a state in which its economic surplus attains its maximum value. This state is proved to be a necessary condition for Pareto optimality of the economy. It is then proved that beside Piguvian corrective taxes the only taxes necessary and sufficient to finance local government activities efficiently, are taxes on land rents. Furthermore, if jurisdiction of a local government is over an exclusive area no intervention of central government is necessary, and local authorities can be fully autonomous. If the economy can be divided into pairwise disjointed exclusive areas, those areas are optimal jurisdictions in the sense that efficiency in the economy can be achieved with local authorities only.     

Asymmetric Capital Tax Competition with Profit Shifting

This paper analyses capital tax competition between jurisdictions of different size when multinational firms can shift some fraction of their tax base between them. For the case of revenue maximizing governments, we show that introducing profit shifting will not generally increase downward pressure on tax rates. We find that profit shifting decreases the tax-base sensitivity of the low tax jurisdiction while increasing the sensitivity of the high tax jurisdiction. Tax rates will converge as a result of additional profit shifting opportunities. This will be the case even though in general equilibrium tax rates in both jurisdictions may decrease or increase.     

Taste-homogeneity of optimal jurisdictions in a Tiebout economy with crowding types and endogenous educational investment choices

We examine a local public goods economy with differentiated crowding. The main innovation is that we assume that the crowding effects of agents are a result of choices that agents make. For example, agents may be crowded (positively or negatively) by the skills that other members of their jurisdiction possess and these skills may be acquired through utility maximizing educational investment choices made in response to equilibrium wages and educational costs. In such an environment, we show that taste-homogeneous jurisdictions are optimal. This contrasts with results for both the standard differentiated crowding model and the crowding types model. We also show that the core and equilibrium are equivalent, and that decentralization is possible through anonymous prices having a structure similar to cost–share equilibrium prices.     

Testing the taxmimicking versus expenditure spill-over hypotheses using English data

Spatial interaction among local governments in tax setting and public spending decisions is receiving increasing attention in the applied public economics literature. Spatial interaction models rely on the presence of an externality from local budget making: in traditional public finance models, external effects originate either from interjurisdictional resource flows due to tax competition for a mobile base, or from local public expenditure spill-overs into neighbouring jurisdictions. However, the recent political agency/yardstick competition literature has stressed the role of ‘informational’ externalities between neighbouring jurisdictions, and predicted tax mimicry at the local level. The actual relevance of the above hypotheses clearly needs to be assessed empirically. In this paper, an attempt is made at discriminating between alternative sources of local fiscal interaction, by using data on the English municipal authorities' budgets. While both public spending levels and local property tax rates exhibit considerable positive spatial autocorrelation, maximum likelihood and instrumental variables estimation results suggest that the interdependence among local governments can be attributed to mimicking behaviour in local property tax setting.     

Centralized versus decentralized provision of local public goods: a political economy approach

This paper takes a fresh look at the trade-off between centralized and decentralized provision of local public goods. It argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions. When spending decisions are made by a legislature of locally elected representatives, this conflict of interest will play out in the legislature. Depending on precisely how the legislature behaves, the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts. The extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending. Thus, the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending, but for different reasons than suggested in the existing literature.     

Mobility and Redistributive Politics

There is widespread concern that greater mobility of individuals can undermine any attempt to redistribute income at the local level. In this paper we derive the equilibrium level of redistribution when both the rich and the poor are imperfectly mobile and when each jurisdiction chooses its redistributive policy by majority voting. This leads to a fundamental interaction whereby the policy choices of jurisdictions determine whom they attract and where whom they attract determines their policy choices. Our main findings are twofold. First, we show that greater mobility of the poor can increase the equilibrium amount of redistribution. Second, we find that some jurisdictions can be in equilibrium on the "wrong" side of their Laffer curve. The reason is that the poor are in a majority in these jurisdictions and they are opposed to a potentially Pareto-improving tax reduction because it would attract the rich and shift the majority. The analysis also reveals how the interplay between policy choices and membership leads to multiple equilibria.     

The limits of liberalism: Good boundaries must be discovered

Determining good boundaries for governance jurisdictions is among the most difficult problems in political theory and political philosophy. But to whom the rules of a given jurisdiction applies is a problem that afflicts private as well as public governance. Clubs have boundaries no less than cities, states, or nations. This essay applies Hayek’s conception of competition as a discovery procedure to boundary problems, arguing that good jurisdictional boundaries are subject to a great deal of contingent variation according to particular the conditions of time and place. Philosophical speculation, therefore, cannot fully replace a trial and error process that facilitates social learning about where good boundaries fall. I outline the features of good boundaries that make them subject to such variation, then evaluate two criteria for evaluating whether existing jurisdictional boundaries are good: one that emphasizes ex ante consent to boundaries, and one that focuses on the ability of individuals to exit from jurisdictions ex post, arguing that the exit-focused approach is underappreciated.     

On the political economy of minority rights. Three ways to manipulate a minority: Goals,rules, and border poles

Language rights for speakers of minority languages are analyzed as well-defined policy measures that are implemented in given jurisdictions. For the implementation of such rights in some countries, certain rules concerning the number and geographical distribution of the speakers of a minority language have to be fulfilled. We discuss, how a policy maker with a given attitude towards the minority can manipulate the policy to further his or her goals. We first provide a normative background for this type of language policy, a benchmark, analyzing language policy on the basis of welfare economics, first discussing why language policy is but one type of public policy, then defining and discussing the benefit or “demand” side assuming that benefits are basically proportional to the number of beneficiaries of the planning measure. We then argue that the costs of a planning measure can be described as a function of two variables, “number of beneficiaries” and “size of area of application”. This lets us analyze planning measures in a two-dimensional model fully characterized by the number of beneficiaries and their geographical distribution in the jurisdiction under consideration. Finally, we characterize the optimal size and extension of the jurisdictions where the language rights are to be implemented. It is then shown, how the policy maker can manipulate the goals of the policy, the implementation rules, as well as the borders of the jurisdictions in order to achieve her or his political goals when they differ from the cost-benefit optimum.     

Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?

The relationship between decentralization and economic growth is generally studied from a perspective stressing universal or quasi-universal regularities across jurisdictions. That approach has generated many insights but seems to reach its limits. The paper explains why it allows contrasting positions with regard to the benefits of decentralization even among proponents of free and competitive markets. And it seems from the empirical literature that no robust and economically significant cross-jurisdiction relation between decentralization and economic performance or growth, except perhaps their independence, has been found. The absence of a relation valid across jurisdictions, however, does not entail the absence of relations specific to each. When jurisdiction specificity is very strong, it is normally difficult to say if there is a relation between observable decentralization arrangements in a jurisdiction and its observable economic performance. However, this may be different under particular circumstances reflecting disequilibrium. Episodes of growth acceleration, when they follow persistent underperformance and include changes in decentralization arrangements, may provide some empirical support to the claim that the relation exists.