community membership aspirations the link between inequality and redistribution revisited the issue at stake is to explain why redistributive policies may vary so greatly for a given distributional skewness to this end we abandon the stylized median voter and study how distributional tensions can act in many different ways depending on social affinity between the different economic classes and their prospect of upward or downward mobility in particular we consider that socioeconomic group membership through its implied social interactions and peer effects is an important determinant of an individual s outcome hence agents while voting on a social contract must take into account the consequences of their choice over their ex post belonging to a particular community this allows us to shed light on how the endogenous sorting of the population into clusters may interact with the balance of political power leading to a non monotonic relationship through the pattern of community formation in the economy between inequality and the pressure for redistributive policies

the implications of competition among jurisdictions does tiebout need politics the paper investigates whether compensation among local jurisdiction is by itself sufficient to ensure efficient provision of local public goods jurisdictions have fixed boundaries and each has an entrenched government with the power to tax and supply the public good residents can move costlessly among jurisdictions it is shown that competition among numerous jurisdictions is not sificient to guarantee public sector efficiency though residents can vote with their feet land is immobile hence governments can unsurp some land rents for their own ends increasing the number of jurisdictions limits but cannot completely eliminate the ability to exercise discretionary governmental power

financial intermediation without exclusivity futures exchanges and other financial intermediaries assume counterparty risks and in return demand guarantees that these counterparties will deliver on their promises it is often argued that to attract volume financial intermediaries would settle for excessively low contractual guarantees in santos and scheinkman 2001 we model financial intermediation in an environment where traders may choose to default and we examine the characteristics of the equilibrium in particular we investigate whether competition implies excessively low standards we show that in fact when society punishes default and intermediaries can impose collateral requirements effectively to limit the size of positions competition leads to a constrained optimal amount of contractual guarantees in santos and scheinkman 2001 we assume that exchanges cannot control the size of the positions taken by individuals but we preclude investors from participating in more than one exchange this ignores the effect that trading with one financial intermediary may have on the risks faced by other intermediaries financial intermediaries typically cannot control the amount of risk that counterparties will take with other intermediaries in this paper we examine the effect of dropping the exclusivity assumption we show that the constrained optimum can no longer be implemented as a standard nash equilibrium with free entry nonetheless this allocation is the only one that can be sustained as an anticipatory equilibrium charles wilson 1977 to break a candidate anticipatory equilibrium it must be possible to add a contract that is profitable and that does not become unprofitable when the now unprofitable contracts from the original menu are withdrawn if one views this requirement as reasonable nonexclusivity reproduces the outcome that obtains when intermediaries enjoy exclusivity but cannot control the size of positions taken against them by traders a superficially similar result holds in the insurance model of richard arnott and joseph e stiglitz 1993 in that model the price of insurance is simply the ratio of what the client pays in the favorable state versus what he receives in the adverse state as a consequence if insurers cannot control the size of policies it makes no difference whether a client buys from one or many insurance companies clients will buy as much as desired at the lowest price as we will show below in our model of financial intermediation agents may want to combine several contracts and this is precisely the reason why the original equilibrium does not survive as a nash equilibrium once exclusivity is dropped

peer group effects and educational attainment abstract given the aims of an educational system the relationship between educational inputs and educational outputs the educational production function a frequency distribution of students by ability and a fixed educational budget how should students and educational expenditures be allocated over classrooms the paper focuses on peer group effects which capture the influence of a student s classmates on his educational attainment and the determinants of whether streaming or mixing is preferable it should be noted that peer group effects arise in other contexts notably in the workplace thus the paper casts some light on the optimal composition of teams

cultural transmission and discrimination workers can have good or bad work habits these traits are transmitted from one generation to the next through a learning and imitation process which depends on parents investment in the trait and the social environment where children live if a sufficiently high proportion of employers have taste based prejudices against minority workers we show that their prejudices are always self fulfilled in steady state and minority workers end up having on average worse work habits than majority workers this leads to a ghetto culture affirmative action can improve the welfare of minorities whereas integration can be beneficial to minority workers but detrimental to workers from the majority group

human capital inequality and growth a local perspective abstract a recent body of work has demonstrated the crucial role played by local human capital externalities and local school funding in generating socio economic segregation persistent poverty and low aggregate income or productivity growth we present a simple model which captures the main insights from this literature and prove three general propositions first minor differences in education technologies preferences wealth or minor imperfections in capital markets can lead to a high degree of stratification second stratification makes inequality in education and income more persistent across generations the same is true for total wealth provided the rich succeed in capturing the rents created by their secession finally this polarization or urban areas can be very inefficient especially in the long run

homeownership community interactions and segregation the authors consider a multi community city where community quality is linked to residents civic efforts such as being proactive in preventing crime and ensuring the quality of publicly provided goods homeownership increases incentives for such efforts but credit market imperfections force the poor to rent within community externalities can lead to segregated cities with the rich living with the rich in healthy homeowner communities and the poor living with the poor in dysfunctional renter communities the pattern of tenure segregation across communities in the united states accords well with the study s prediction the authors analyze alternative tax subsidy policies to alleviate inefficiencies in the housing market and identify the winners and losers under such policies

job information networks neighborhood effects and inequality this paper explores the theoretical and empirical literature to examine the use by different social groups of informal sources of information provided by friends relatives and acquaintances during job search and its consequences for the job market it also addresses the role of network structure and size the resource endowments of contacts and nature of the links between contacts to explain differences in the effects of job information networks in doing so the paper also turns to the sociology literature on job information networks and provides an economic perspective on such sociological concepts as strong versus weak ties inbreeding distance from structural holes etc the paper distinguishes between models of exogenous job information networks that is where individuals obtain job related information through a given social structure and endogenous job information networks which are social networks that result from individuals uncoordinated actions the paper pays special attention to such issues as physical and social proximity and sharing of information and discusses them in the context of the recent social interactions and neighborhood effects literature finally the paper outlines a model that integrates job information networks where interactions occur in business cycle frequencies with the dynamics of human capital formation which include the joint effects of parental community and neighborhood human capital and are set in life cycle frequencies for the purpose of organizing suggestions for future research and examining earned income inequality

educational vouchers and cream skimming educational vouchers and cream skimming epple and romano 1998 show equilibrium provision of education by public and private schools has the latter skim off the wealthiest and most able students and universal vouchers lead to further cream skimming here we study voucher design that injects private school competition and increases technical efficiencies without cream skimming conditioning vouchers on student ability without restriction on participating schools policies fails to affect significantly cream skimming however by adding restrictions like tuition constraints such vouchers can reap the benefits of school competition without increased stratification this is accomplished while allowing voluntary participation in the voucher system and without tax increases

non existence of equilibria in multicommunity models abstract this paper reconsiders equilibrium existence in models with migration and voting over local public goods we show that under some straightforward assumptions on preferences and income distributions the basic structure of multicommunity models i e perfect mobility majority rule single crossing property implies that no equilibrium with jurisdictions conducting different policies can exist stratification equilibria with sorting of the population according to income classes are therefore not as natural as is sometimes suggested mechanisms that can serve to support stratification i e tight housing markets returns to scale in the provision of publicly consumed goods are discussed

the economics of schooling production and efficiency in public schools n recent years public and professional interest in schools has been heightened by a spate of reports many of them critical of current school policy these policy documents have added to persistent and long standing concerns about the cost effectiveness and fairness of the current school structure and have made schooling once again a serious public issue as in the past however any renewed interest in education is likely to be short lived doomed to dissipate as frustration over the inability of policy to improve school practice sets in this frustration about school policy relates directly to knowledge about the educational production process and in turn to underlying research on schools although the educational process has been extensively researched clear policy prescriptions flowing from this research have been difficult to derive 2 there exists however a consistency to the research findings that does have an immediate application to school policy schools differ dramatically in quality

clubs local public goods and transportation models a synthesis abstract clubs local public goods and transportation models are analyzed within a unified model the emphasis is on the derivation of optimal allocation pricing and the size of the sharing group we derive the conditions under which optimal prices will yield surplus or deficit as well as those under which competitive provision will be efficient given heterogeneous tastes we prove that segregation according to tastes is generally efficient although several cases where this result does not hold are also discussed we show that the existing literature is unnecessarily restrictive and that the unified approach suggested here considerably extends the existing analysis of clubs local public goods and the transportation problems

the desegregating effect of school tracking this paper makes the following point detracking schools that is preventing them from allocating students to classes according to their ability may lead to an increase in income residential segregation it does so in a simple model where households care about the school peer group of their children if ability and income are positively correlated tracking implies that some high income households face the choice of either living in the areas where most of the other high income households live and having their child assigned to the low track or instead living in lower income neighbourhoods where their child would be in the high track under mild conditions tracking leads to an equilibrium with partial income desegregation where perfect income segregation would be the only stable outcome without tracking

wage comparability in the u s postal service federal law requires that the u s postal service pay wages comparable to those paid in the private sector the authors argue that the appropriate test of that concept is a comparison of the wages

labor market integration investment in risky human capital and fiscal competition this paper presents a general equilibrium model where human capital investment increases specialization and exposes skilled workers to region specific earnings risk interjurisdictional mobility of skilled labor mitigates these risks state contingent migration of skilled labor also improves efficiency with perfect capital markets labor market integration raises welfare and reduces ex post earnings inequality if instead human capital investment can only be financed through local taxes labor market integration leads to interjurisdictional fiscal competition shifting the burden of taxation to low skilled immobile workers decentralized public provision of human capital investment creates earnings inequalities and is inefficient

a pecuniary reason for income mixing abstract empirical studies have found a high degree of income mixing in american neighborhoods we give a new explanation of this phenomenon that is based on consumer search a low price for a given good benefits high valuation buyers more than low valuation buyers but with search the probability of obtaining a low price is increasing in the proportion of low valuation buyers this gives high valuation buyers an incentive to live near low valuation buyers with many goods a buyer has an incentive to live near neighbors whose valuations are uncorrelated with hers

intergenerational correlation and social interactions in education we propose a dynastic model where individuals are born into an educated or uneducated environment that they inherit from their parents we study the impact of social interactions on the correlation in parent child educational status independently of any parent child interaction when the level of social interactions is decided by a social planner we show that the correlation in education status between generations decreases very fast as social interactions increase in turn when the level of social interactions is decided by the individuals themselves we show that the intergenerational correlation still decreases although less rapidly than with exogenous social interactions

educational vouchers welfare effects and voting abstract we analyze the welfare effects and voting equilibrium with vouchers for private schools the analysis shows that vouchers like tuition tax credits martinello and west 1988 frey 1983 may improve the welfare of all families including families whose children remain in public schools if public educational quality is unchanged and publicly financed educational expenditures decrease thus voters will approve a voucher only if it reduces taxes when public educational quality is endogenous a voucher may increase quality by reducing the tax cost of quality and will be approved if it reduce taxes at the pre voucher public education level and increases quality

disentangling the demand function from the production function for local public services the case of public safety abstract in this paper we develop a theoretical framework and an econometric model which allow us to separate the effect of income and other socioeconomic variables on the demand for publicly provided goods from their effect on the price of those goods we apply our approach in a study of expenditures for police protection in a cross section of 73 u s cities and counties our results suggest that studies of public expenditures which fail to incorporate community characteristics in production and cost functions can yield very misleading results

equilibrium and inefficiency in a community model with peer group effects public service output depends on input expenditures on own personal characteristics and on the characteristics of the other residents in the community the peer group effect in a community model with public expenditures set by voting with migration between communities and with land price differentials capitalization it is shown that communities may become heterogeneous in composition and second best inefficient this equilibrium occurs when the peer group effect is neither too strong nor too weak the inefficiency arises because an externality is created by migration the land price differential does not play the part of the price of the better peer group but of a transfer payment

majority choice of tax systems in single and multi jurisdictional economies abstract we examine majority choice of tax instruments in an economy with heterogeneous households in our framework majority voting equilibrium exists despite the multidimensional policy choice set we examine single and multi jurisdictional economies we identify five competing incentives that influence choice of tax instruments equilibria generally entail a mixture of tax types with multiple jurisdictions strong reliance on head taxation in rich communities arises to deter poorer households from immigrating in spite of local incentives to use alternative tax instruments to redistribute wealth if relocation costs preclude inter community mobility the equilibrium tax system is fundamentally affected with redistribution incentives then dominating choice of instruments and tax rates limiting or eliminating head taxation fundamentally alters stratification public good provision levels and tax systems

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

subsidies as sorting devices abstract the divergence between tax payments and the cost of providing public services that arise from financing local public services provides an incentive for higher income communities to deter the entry of lower income households into their community here we demonstrate that higher income households to insure that low income households do not enter their community or reduce the number that do enter subsidize goods consumed by higher income households more than by lower income households this strategy will make the rich community less attractive to the poor deterring their entry to the community

stratification social networks in the labour market and intergenerational mobility young individuals taking the locational choices made by their altruistic parents as given decide whether or not to acquire skills the use of location specific word of mouth communication in the transmission of information about skilled job opportunities implies that the local social environment partly determines an individual s expected returns to education stratified equilibria when they exist are characterised by low intergenerational social mobility and inefficient use of talent in addition the equilibrium responses to factors that generally encourage education may in stratified outcomes be highly asymmetric across socio economic groups non stratified equilibria are likely to be destabilised by measures that encourage education

local government structure and urban residential location the large research literature on the tiebout model has developed with little attention paid to the urban economic structure in which local government functions this paper attempts to examine the theoretical consequences of local jurisdictions functioning within a conventional monocentric urban model it also discusses a mathematical formulation of a two jurisdiction linear city in which the local service level and local property tax rate might be used as strategic variables in a game theory sense it is concluded that for this to happen the local service level has to have more than one element which is intuitively appealing some references are developed to current british local government and possible changes

incentives and optimal size of local jurisdictions abstract a model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning public goods production costs and the central government has imperfect information on spillover effects induced by local projects the attention is focused on the optimal size of local entities and on the shape of transfer schedules from the central government to local jurisdictions the optimal territorial organization is a compromise between small jurisdictions so as to benefit from the geographical proximity effect on information and large entities in which spillover effects are more easily internalized by means of linear or non linear taxation schemes implemented by the centre

efficiency equilibrium and exclusion when the poor chase the rich using a simple adverse selection model we characterize equilibrium when the rich chase the poor if communities are established by competitive entrepreneurs the equilibrium exists is unique and is efficient it involves either complete separation or complete pooling different income groups may rank these qualitative outcomes differently we show how restrictions imposed by a central government may alter the nature of equilibrium such restrictions may be explained as the choice of a low income majority altering the equilibrium to the pooling outcome which they prefer

tiebout economies with differential genetic types and endogenously chosen crowding characteristics abstract we consider a tiebout economy with differential crowding and public projects in which agents are distinguished by their tastes and genetic endowments agents choose which crowding characteristic for example a skill they wish to express and this affects their value to other members of their jurisdiction club firm etc an agent s choice is influenced both by his genetic endowment which affects his cost of acquiring crowding characteristics and by his preferences over which crowding characteristic he expresses we show that if small groups are strictly effective the core is equivalent to the set of anonymous competitive equilibrium outcomes but that the core generally contains taste homogeneous jurisdictions journal of economic literature classification numbers h41 h72

equivalence of the core and competitive equilibrium in a tiebout economy with crowding types abstract we propose a new model of a local public goods economy with differentiated crowding the new feature is that taste and crowding characteristics of agents are distinguished from one another we prove that if the economy satisfies strict small group effectiveness then the core is equivalent to the set of tiebout equilibrium outcomes equilibrium prices are defined to depend solely on crowding characteristics this implies that only publicly observable information and not private information such as preferences is needed to induce agents to sort themselves into efficient jurisdictions thus our model allows us to satisfy bewley s 6 anonymity requirement on taxes in his well known criticism of the tiebout hypothesis

interregional redistribution and mobility in federations a positive approach the paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice we find that paradoxical consequences of inter jurisdictional transfers arise if people are mobile while self sufficient regions are nec essarily identical with respect to policies and average incomes in our model interregional redistribution always leads to the divergence of regional policies and per capita incomes thus interregional redistribution prevents interregional equality at the same time however transfers may allow for more interpersonal equality among the inhabitants of each region the voting population may therefore in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence empirical evidence from panel data from oecd countries and candian provinces is consistent with the theory