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The Efficiency and Equity of Tiebout in the United States

Taxes, Services, and Property Values

Thomas J. Nechyba

May 2007, English

Land use control is not the only public action that can affect property values; local service provisions and environmental conservation also play a role. From the Tiebout perspective, Thomas J. Nechyba analyzes the efficiency and equity issues related to local service provisions under U.S. fiscal federalism. The idea that land and housing markets often facilitate interjurisdictional competition is central to Charles M. Tiebout’s argument but implicit in his original article (Tiebout 1956; Fischel 2006). Nechyba makes that connection explicit.

The Tiebout model may have significant implications for the solution of the excessive zoning tax (or “monopoly zoning”) problem. If interest groups manipulate zoning requirements to keep property prices high in a neighborhood, communities with similar attributes will emerge—as predicted by the Tiebout model—and will use less stringent land use restrictions to attract home buyers to their areas. Housing demand in the more regulated area will decline, and property prices will fall. This “exit-entry” mechanism will continue until housing prices in all communities are equalized. Thus, the Tiebout model suggests that excessive zoning should not endure in the long run.

Nechyba notes, however, that there is no ideal world in which the supply of local jurisdictions is perfectly elastic, household mobility is unconstrained, transaction costs are absent, and interjurisdictional tax and spending spillovers do not exist. So long as these assumptions of the Tiebout model do not hold in reality, there is always room for political maneuvering, rendering the idea of voting with one’s feet inefficacious.

Nechyba is particularly concerned about the inequitable outcome implied in the Tiebout model—educational opportunities for children will be unevenly distributed. He calls this outcome “categorical inequity,” and argues that sorting local residents according to their ability to pay for public services will inevitably lead to racial segregation. Poor Hispanic and African American households are likely to live in jurisdictions where the quality of public schools is low—not because they do not want their children to attend good schools, but because high housing prices prevent poor minority families from purchasing property in the more expensive neighborhoods and gaining access to the higher-quality public schools and other public services provided in those areas.

Nechyba proposes as a potential remedy decoupling school choice from residential location. Because enrollment in private schools is not restricted to particular residential areas, minority households can shop for housing bargains in lower-price communities and yet have the freedom to choose a good private school for their children if they can afford it. These complications of Tiebout efficiency notwithstanding, Nechyba asserts the importance of the model in shaping views on how public goods can be provided effectively in a world characterized by externalities, imperfect competition, and asymmetric information.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2006 and is Chapter 4 of the book Land Policies and Their Outcomes.