The Median Voter according to GARP

Abstract

This paper adapts the generalized axiom of revealed preference (GARP) empirical method to the public goods problem to test whether observed municipal public spending can be explained "as if" the city governments maximize the utility of the median income voter. It applies the test procedure for medium-size municipal governments in five Midwest states. The data are consistent with GARP and reveal that the local governments in the sample behave as if they maximize median voter utility once we control for the state-specific effects, government management structure, and population density. The median voter hypothesis is the proposition that local governments behave "as if" they maximize the utility of the median income voter in the jurisdiction. Although an important tool in public economic analysis, there has been no conclusive direct test of the maximization hypothesis to date. Revealed preference theory shows that any finite set of price and quantity observations satisfying the generalized axiom of revealed preference (GARP) can be rationalized by the constrained maximization of an increasing, continuous, concave utility function (Afriat 1967, 1973; Varian 1982). This paper adapts the revealed preference method to the public goods problem in order to test municipal spending data for consistency under GARP, thereby providing the first direct test of whether or not the local governments behave "as if" they maximize median voter utility. The median voter hypothesis represents a simple tool that is the most widely used characterization of local government behavior. Given its prominence in the literature, it is not surprising that the hypothesis itself has become the subject of scrutiny. The framework assumes direct or representative democracy without strategic behavior, in which competition among politicians ensures that the public sector bureaucracy responds efficiently to voters' desires. Public sector decision making reduces to an "as if" constrained maximization problem, a simplified picture of the outcome of collective action. Still, much of the empirical testing literature is motivated by concerns over whether the model is too simplistic. Nonetheless, it can be argued that, given its depiction as an "as if" outcome, the median voter hypothesis should be judged not by its descriptive accuracy of the public sector decision process but instead by how well it explains observed local fiscal choices. On this basis, the existing empirical evidence, although mixed, reveals a surprising amount of indirect support for the framework. One approach taken in the literature is to evaluate the median voter hypothesis by testing the predictive power of regression equations with median income and tax price terms for explaining state or local fiscal behavior. In this line of the