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The Tiebout Hypothesis: Near Optimality in Local Public Good Economies

Myrna Wooders

Abstract

Over two decades ago, Charles Tiebout conjectured that in economies with local public goods, consumers "vote with their feet" and that this "voting" creates an approximate "market-type" equilibrium. He hypothesized that this approximate equilibrium is "nearly" optimal and, the smaller the moving costs, the closer the equilibrium is to an optimum. This paper provides a formal model of an economy with a local public good and endogenous jurisdiction structures (partitions of the set of agents into jurisdictions) which permits proofs of Tiebout's conjectures. Analogues of classical results pertaining to private-good economies, such as existence of equilibrium and convergence of the core to equilibrium states of the economy, are obtained for the approximate equilibrium and approximate cores.