Local Government Inefficiency and the Tiebout Hypothesis: Does Competition among Municipalities Limit Local Government Inefficiency?

Abstract

The Hypothesis has, in the past thirty years, come to refer to a number of different propositions about local public service provision. First, there is the point initially stressed by Tiebout [15], that the mobility of consumer-voters results in a market type of solution to public service provision in which people's demands for public services are revealed as they sort themselves among localities according to their tastes for public services. Second, also discussed by Tiebout, is the proposition that local public services will tend toward efficient provision. Finally, there is the claim that the mobility of consumers and the competition among the localities for these consumers make politics relatively unimportant in determining local public service provision. The bulk of the empirical work on the Tiebout hypothesis has attempted to determine if, as Tiebout suggested, local public services are efficiently provided. The most common approach has been to estimate the effects of public service provision and tax policy on property values and determine if a balanced budget change in the tax rate changes property values. If not, then property values are being maximized with respect to public services and public services, therefore, are efficiently provided. Studies using this technique include those by Oates, Brueckner, and Sonstelie and Portney [11; 1; 2; 13]. These empirical studies, while providing evidence about whether or not public services are provided efficiently, do not suggest the reasons why local public services are, or are not, efficiently provided. Are the limits on inefficiency in the local public sector attributable to local politics or are they the result of the constraints imposed on local governments because of the mobility of residents and capital? Evidence that local public services are efficiently provided cannot be considered support for the contention that the mobility of people and capital are the factors responsible for this efficiency. Romer and Rosenthal [12], for example, provides evidence from