Abstract
Abstract. The Tiebout hypothesis that consumer mobility and interjurisdictional competition leads to efficient provision of local services has provoked much controversy and debate in recent years. This article summarizes the opposing and conflicting viewpoints on this subject and presents a synthesis of the theoretical and empirical literature. The basic conclusion of this literature is that only under very restrictive assumptions will foot‐voting and interjurisdictional competition ensure allocative efficiency in the local public sector. Nevertheless, the Tiebout mechanism offers important insights for public policy debates on the assignment of taxes and services and the design of equalization grants. Oates' suggestion that capitalization of fiscal differentials into residential property values provides an empirical test of the Tiebout hypothesis also generated an intense debate on the theoretical validity of this procedure and a heightened interest in its empirical applications. This debate is evaluated and an overview is given of the leading empirical approaches to test the efficiency and equity implications of the Tiebout mechanism. Controversial empirical issues such as the choice of the tax price term, the level of aggregation and econometric estimation problems are highlighted in this part of the survey.
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