Establishing the Micro Foundations of a Macro-Level Theory: Information, Movers, and the Tiebout Market Model

Abstract

"The Tiebout model is one of our most important theories of local government. It is also one of the most controversial. Current debate over the Tiebout model revolves around the apparent disparity between results of macro- and micro-level empirical studies. While macro-level evidence shows greater efficiency in the supply of public goods in polycentric municipalities compared to consolidated ones, evidence of widespread citizen/consumer ignorance has been used to argue that individual actions cannot plausibly lead to competition (and hence efficiency gains) among local governments. We argue that previous empirical work has ignored a fundamental point about how markets work: competitive markets are driven by only a subset of consumers. These informed marginal consumers shop around between alternate suppliers and produce pressure for competitive outcomes from which all consumers benefit. In our research, we differentiate between average and marginal consumer/citizens and update the Tiebout model by incorporating the costs of information gathering, the costs of mobility, and the strategic interests of municipal governments. Using data from a survey of over 500 households, we present evidence on how a class of informed citizen/consumers may satisfy the most important assumptions of the Tiebout market model."