Tiebout model

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

Properties and assumptions

According to Tiebout's approach, communities like companies can be viewed in a competitive market for mobile residents (taxpayers). In this competition - the driving force of which is the potential migration of individuals between the communities - they have an incentive to provide the optimal amount of public goods according to the preferences of their citizens. The reason for this is that the individuals choose their respective place of residence in such a way that it offers them optimal living conditions with regard to their individual preferences ( 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 from one another in terms of the level of provision of public goods and the tax burden. The model is based on a number of assumptions:

  • The individuals are completely mobile and choose their place of residence according to their individual preferences with regard to possible combinations of the provision of public goods and tax to be paid ( voting by feet ).
  • Individuals' incomes are independent of their choice of place of residence (no employment effects).
  • There are no mobility costs.
  • The individuals have complete information about the municipal offers of public goods and the corresponding tax burdens.
  • There is a large number of communities (polypolistic market structure) and the choice of residence is free.
  • The municipalities are like profit-maximizing companies with the action parameters of the provision of public goods and tax burden, about which they decide autonomously.
  • There is also an optimal number of inhabitants for each municipality that is to be reached.
  • The public goods provided in each case can only be consumed by local residents (no external effects).

As a result, the mobility of individuals (whose migratory movements serve both to reveal preferences and to aggregate preferences), the fiscal autonomy of the individual communities and the competition between them lead to a market mechanism with migratory movements. In equilibrium, there is a Pareto-efficient allocation of public goods and the residential distribution of residents. Regional clubs with largely homogeneous preferences will tend to be formed.

criticism

The focus of criticism is often the restrictive assumptions, especially those of the complete mobility of individuals. The actual immobility of individuals is the cause of a massive discrepancy between the results of the tiebout model and reality. An exit option would only be used if there were extraordinarily high tax burdens in connection with an insufficient supply of public services (pain threshold), because only then would the costs of emigration be offset by a corresponding benefit. However, the corresponding churn costs are not taken into account by the tie-out model.

Another major point of criticism is often cited as information costs that exist in the run-up to a possible migration movement with regard to the acquisition of information about the supply of public goods and the burden of taxes in other municipalities. However, it can initially be countered that i. d. Usually complete information is not optimal. Individuals will seek information as long as the benefit of additional information acquisition is greater than the associated cost. However, due to actual information costs, citizens are i. d. Usually only incompletely informed about the respective alternatives. An emigration to a municipality that best suits the respective preferences is therefore at least questionable.

Furthermore, the assumption is problematic that in the Pareto-efficient result every municipality is optimally large or that corresponding efforts are made to achieve an optimal size, i.e. measures to attract residents or to encourage them to emigrate. If one takes into account that the individuals turn to the community that best corresponds to their preferences with regard to the taxes to be paid and the public goods offered for them and further that the preferences of the individuals can be very heterogeneous, it follows that the number of communities accordingly should be high. In this context, the existence of an optimal community size can be problematic, for example if a certain preference structure only exists once. The minimum size of a community, which is necessary to ensure the efficient provision of public goods, can therefore hardly be achieved if the preferences of the individual economic subjects are too heterogeneous.

swell

  • C. Tiebout: A Pure Theory of Local Expenditures. In: The Journal of Political Economy. Volume 64, No. 5, 1956, pp. 416-24.
  • Seokjin Woo: Tiebout Migration and Retirement of Older Workers. Job market paper. University of Wisconsin-Madison, 2005.