Working Paper: CEPR ID: DP2273
Authors: Ignatius J. Horstmann; Kimberley Scharf
Abstract: This paper examines a model of jurisdiction formation where individuals differ in both income and preferences, and where public provision choices within jurisdictions are the outcome of a political process, but can be supplemented by private contributions. Locational equilibria in this model can feature inefficient segregation along income lines, which is more likely to occur the larger is income heterogeneity. Furthermore, the model predicts that an increase in income heterogeneity can be accompanied by an increase in private provision. This prediction squares with the observed correlation in the U.S. between rising income inequality on the one hand, and recent trends towards fiscal devolution and privatization on the other.
Keywords: fiscal federalism; private provision of public goods; jurisdiction formation
JEL Codes: H20; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased income inequality (D31) | jurisdictional segregation (H73) |
| Income inequality (D31) | reliance on private provision of public goods (H42) |
| Increased income heterogeneity (D31) | jurisdictional segregation (H73) |
| jurisdictional segregation (H73) | decrease in public good provision (H42) |
| jurisdictional segregation (H73) | increase in private contributions (D64) |
| Higher income individuals (D31) | seek segregation from lower-income individuals (R28) |