Tiebout model

The Tiebout model is a model of the provision of tax-financed public goods. It provides a basis of the analysis of fiscal competition ( theory of efficient tax competition ). It was developed by the economist Charles Tiebout.

Properties and assumptions

After Tiebouts approach, communities and businesses can be considered in a competitive market for mobile citizens ( taxpayers). In this competition - the driving force are potential migration of individuals between communities - they have an incentive to provide in accordance with the preferences of its citizens optimal amount of public goods. The reason for this is that individuals choose their living place so that it provides them with regard to their individual preferences optimal living conditions ( voting by feet ). The migration of individuals leads in equilibrium to a Pareto- efficient situation in which a large number of communities exist, which differ in the level of provision of public goods and the tax burden. The model is based on a number of assumptions:

  • The individuals are perfectly mobile and choose their residence according to their individual preferences regarding possible combinations from the provision of public goods and paying tax ( voting by feet ).
  • The incomes of individuals are independent of the choice of residence ( no employment effects ).
  • There are no mobility costs.
  • The individuals have perfect information regarding the local deals of public goods and the corresponding tax burdens.
  • There are a number of communities ( polypolistic market structure ) and the choice of residence is free.
  • The municipalities same profit-maximizing firms with the action parameters provisioning amount of public goods and tax burden, which they autonomously decide.
  • It also exists for each community an optimal number of inhabitants, which is to be achieved.
  • The provided each public goods can only be consumed by the locals (no external effects).

As a result, the mobility of individuals ( their migration at the same time the preference revelation and preference aggregation used ) result, the fiscal autonomy of the individual communities and the competition between them to a market mechanism with migration. In equilibrium, there is a Pareto- efficient allocation of public goods and residential distribution of the population. Regional clubs will tend to thereby form of largely homogenous preferences.

Criticism

In the center of criticism are often restrictive assumptions, in particular that of perfect mobility of individuals. The actual immobility of individuals is the cause for a massive discrepancy between the results of the Tiebout model and reality. An exit option would only noticed when extraordinarily high tax charges related to an insufficient supply of public services were fulfilled ( pain threshold ), because only then stood the cost of a migration a corresponding benefit gain over. Corresponding migration costs are not taken into account by the Tiebout model.

Another major point of criticism information costs are often cited, which consist in advance of a possible migration in terms of information acquisition over the supply of public goods and the burden of taxes in other municipalities. However, the first may be objected that usually complete information are not optimal. Individuals will obtain so long as the benefit of additional information on obtaining the corresponding cost is information. Based on actual cost information but citizens are usually only incomplete information about the respective alternatives. A migration to a respective preferences that best meets community is therefore at least questionable.

Furthermore, the assumption is problematic that the Pareto- efficient outcome every community is the optimum size and corresponding efforts would be made to achieve an optimal size, ie measures to attrahieren residents or to move to migrate. Taking into account that the individuals of the community turn that best suits their preferences regarding the duties payable and offered for public goods and further, that the preferences of individuals can be very heterogeneous, it follows that the number of municipalities in accordance would be high. In this context, then, the existence of an optimal size of the community be problematic, such as when a particular preference structure exists only once. A municipality minimum size that is necessary to ensure efficient provision of public goods is, therefore, very difficult to realize when the preferences of individual economic agents are heterogeneous.

Swell

  • Tiebout, C., "A Pure Theory of Local Expenditures ", The Journal of Political Economy, 64 (5) :416-24, 1956.
  • Woo, Seokjin, " Tiebout Migration and Retirement of Older Workers ," job market paper. University of Wisconsin- Madison, 2005
  • Economics
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