Tiebout model

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The Tiebout model, also known as Tiebout sorting, Tiebout migration, or Tiebout hypothesis, is a positive political theory model first described by economist Charles Tiebout in his article "A Pure Theory of Local Expenditures" (1956). The essence of the model is that there is in fact a non-political solution to the free rider problem in local governance. Specifically, competition across local jurisdictions places competitive pressures on the provision of local public goods such that these local governments are able to provide the optimal level of public goods

The Tiebout model is a positive political theory model first described by economist Charles Tiebout in his article "A Pure Theory of Local Expenditures" (1956). The essence of the model is that there is in fact a non-political solution to the free rider problem in local governance. Specifically, competition across local jurisdictions places competitive pressures on the provision of local public goods such that these local governments are able to provide the optimal level of public goods

In Tiebout's paper, he discusses two paths that municipalities can take to acquire more population. One is for municipalities to act as a cartel and enforce a single tax rate among various communities. Tiebout argues that this diminishes individual voice and exit rights. The other option is for municipalities to engage in tax competition. The results of both are the same, with each municipality's tax rate converging to the average, Tiebout argues. Tax competition is an essential part of the market process between government and citizens.

The Tiebout model relies on a set of basic assumptions. The first premise is that consumers can freely choose their region and move between towns freely (without cost), possess complete information, and public lending is equally available. This means that consumers can move freely from region to region and are aware of all services provided by local governments and tax rates for all local governments. Furthermore, for this model to work, a sufficient number of towns must exist so that individuals' preferences for public goods are classified into similar groups. Thus, the Tiebout model has been shown to be most accurate in suburban areas where many different independent communities exist.

Tiebout's exact assumptions in his initial statement of the model were as follows:

Mobile consumers who can freely choose where to live. There are no costs associated with moving.

Complete information is provided.

Consumers can choose from many communities.

Commuting is not a problem.

Public goods do not spill over from one community to the next in terms of cost/benefit.

An optimum city size exists: economies of scale.

Local communities seek to achieve the "right" size.

Local communities are rational and seek to exclude "bad" consumers.

Differences in financial attractiveness among towns are reflected in home prices. The price of a home reflects the costs (including property taxes) and benefits (including public goods in the area) of living in that home.