Leviathan, local government expenditures, and capitalization

Abstract

A number of recent studies have found a positive relationship between local government expenditures and the concentration of local governments, offering support for the contention of Brennan and Buchanan [Brennan, G., Buchanan, J., 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press, Cambridge] that Leviathan governments are limited by competition among localities. I develop an alternative explanation. Expenditures are greater in large cities because the costs of inefficiency to residents are lower there. While tax increases in small cities are fully capitalized into property values, they are not for large cities. Because residents of large cities do not bear the full burden of inefficiently high taxes they have less incentive to limit government inefficiency.