Absurdities of the Tiebout Model
Economists across the political spectrum embrace the realism of the Tiebout model. The model’s intuition: At the level of local government, there are many consumers (i.e. residents and businesses), many suppliers (i.e. localities), and low switching costs – all the key ingredients of perfect competition.
The upshot: We don’t need to worry about the efficiency of local government policy. The quasi-free market will take care of things. To retain population and business, local governments have to offer a competitive package of taxes and benefits. Any government that implements policies that fail a cost/benefit test will by definition be unable to pass the market test. At the local level, therefore, whatever is, is efficient.
To repeat, the Tiebout model enjoys bipartisan support. Liberal economists like the Tiebout model because it exempts at least one level of government from criticism. Conservative economists like the Tiebout model because it affirms the value of competition and decentralization. On reflection, however, the Tiebout model has big absurd implications.
Absurdity #1: There will be no redistribution at the local level.
If a locality even slightly overcharges any segment of the population (the rich, the childless, business, whoever) for the services it receives, that segment will flee. Final resources redistributed: zero. Defenders of the model often actually claim that this implication is true, but there’s an ironclad counter-example: public schools. Even today, public schools are heavily funded by property taxes – and the rate has nothing to do with the taxpayer’s number of school-age children.
In a Tiebout world, there would be immediate blowback. Childless residents would flee to their own separate, child-free, school-free, ultra-low-tax district. Residents with one child wouldn’t want to join them, but they wouldn’t want to subsidize their more fertile neighbors, either. They’d have their own separate one-child, small-school, low-tax-district. And so on.
On further reflection, the Tiebout model also predicts far lower taxes on businesses than on residents. Unless there’s slavery, business is inherently “childless.” Any locality that taxed business property to fund public schools would find itself bereft of business. Business would then relocate a foot from the residential locality’s border – and pay only the taxes necessary to pave the roads, patrol the streets, and put out the fires. To forge a mixed-use district, local government have to charge businesses lower tax rates than flesh-and-blood families.
The one exception to the “no Tiebout redistribution” rule is redistribution that corrects local externalities. Tiebout governments might tax emissions to clean the air or impose congestion tolls to clear the roads. The catch, however, is that everyone who continues to reside in the locality must selfishly prefer the redistribution’s indirect benefits to its direct costs.
In a Tiebout world, any social insurance program would have to act like a for-profit insurance company. Rates would match risks, pure and simple. This means that the poor would probably pay not just higher tax rates for welfare or unemployment insurance than Bill Gates; each poor person would probably pay more dollars of taxes for these programs than Bill Gates. After all, what is the probability that Gates will ever go on welfare? One-in-a-billion?
Absurdity #2: There will be no waste at the local level.
In the Tiebout model, local governments only supply goods if they have a cost advantage over the private sector. If a locality taxes a resident $1000 to buy the resident goods that the market could supply at $900, the resident will move away – and a competing locality will eagerly accept his patronage. The only way to retain people and money, therefore, is to deliver the goods at the lowest possible cost. If the private sector does the job best, local governments will embrace laissez-faire.
By this argument, if the private sector could supply education more cheaply than the public sector, there would be no public education. “Unfair to the poor”? That’s not Tiebout talk.
Yet the NEA need not despair. The mere fact that school vouchers haven’t been adopted proves that public schools work better than any alternative – bloated budgets and illiterate students notwithstanding. The same goes for zoning, local licensing, massive park lands that almost no one uses, etc. Everything local governments actually do has to pass that quasi-market test, so who are economists to second-guess the result?
Coming soon: The Tiebout model is wrong in fact, but how can it be wrong in theory?
P.S. Comments somehow got turned off. Now they’re back on.
Update: David Friedman emailed me the following comment:
What’s wrong with it is that land can’t move. If the local government
engages in exploitive taxation, pocketing the money, people move out. As
they move out, land values fall. They stop moving when the drop in land
value just balances the cost of the exploitive taxation.
The implication, if the rulers are smart, is that they will produce an
efficient bundle of services, but tax away the land value and pocket it.
Also true. I even published this exact model:
But I think there’s a deeper problem which I’ll soon post.