Oates’ decentralization theorem with imperfect household mobility

Abstract

This paper studies how Oates’ trade-off between centralized and decentralized public good provision is affected by changes in households’ mobility. We show that an increase in household mobility favors centralization. This results from two effects. First, mobility increases competition between jurisdictions in the decentralized regime, resulting in lower levels of public good provision. Second, while tyranny of the majority creates a gap between social welfare in different jurisdictions in the centralized regime, mobility allows agents to move to the majority jurisdiction, raising average social welfare. Our main result is obtained in a baseline model where jurisdictions first choose taxes, and households move in response to tax levels. We show that the result is robust to changes in the objective function and the strategic variable of local governments.