Working Paper: NBER ID: w17251
Authors: Stephen Calabrese; Dennis N. Epple; Richard Romano
Abstract: We 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. We characterize the first-best allocation and show efficiency can be implemented with decentralization using head taxes. We 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. In property tax equilibrium centralization is frequently more efficient! An externality in community choice underlies the failure to achieve efficiency with decentralization and property taxes: Poorer households crowd richer communities and free ride by consuming relatively little housing thereby avoiding taxes.
Keywords: Decentralization; Tiebout Competition; Local Public Goods; Welfare Effects
JEL Codes: H1; H4; H7; H73; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decentralized multicommunity provision fails to achieve potential welfare gains (D61) | small average welfare losses (D69) |
| decentralized multicommunity provision fails to achieve potential welfare gains (D61) | negating potential gains (D81) |
| housing consumption distortions due to property taxation (H31) | average welfare losses (D69) |
| voting distortions in the choice of property taxes (D72) | average welfare losses (D69) |
| jurisdictional choice externality (H73) | average welfare losses (D69) |
| poorer households crowd richer jurisdictions (R23) | average welfare losses (D69) |
| free riding behavior of poorer households (D19) | higher efficiency costs in richer communities (D61) |
| jurisdictional choice externality (H73) | potential Tiebout sorting gains (H73) |