congested public goods the case of fire protection abstract this paper uses a fire protection measure based on a community s fire insurance rating to estimate the strength of congestion effects for fire protection services the empirical results show that the congestion properties of fire protection are much like those of a pure public good in addition the paper introduces a new notion of returns to scale for public goods and estimates the relevant parameters for the fire protection case

income redistribution in a common labor market when households are mobile among jurisdictions income redistribution by individual jurisdictions creates fiscal externalities a model of interjurisdictional migration is used to study the nature of this redistributive externality analysis of optimal redistribution and optimal corrective subsidies from higher level governments shows that benefit levels for the recipients of income transfers and tax rates on mobile taxpayers should be equalized across jurisdictions a system of jurisdictions with a common labor market can achieve welfare improvements through coordination of domestic redistributive policy or through the intervention of a higher level government copyright 1991 by american economic association

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

optimal pricing of a congestible good with random participation abstract this paper studies the optimal pricing of a congestible network good offered by a monopoly who faces a double asymmetry of information concerning both users valuations and users unit waiting costs which leads to a random participation problem we show that the textbook price is lower than the price with random participation

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

taxation and the tiebout model the differential effects of head taxes taxes on land rents and property taxes on the theory of state and local public finance is the seminal paper by charles tiebout 1956 tiebout constructed a multijurisdictional model in which independent local governments offer a wide variety of expenditure and tax policies and perfectly mobile consumers reveal their preferences for local public goods through their choice of residential community he argued that under such circumstances local public service provision would be efficient the tiebout model has formed the basis of a vast number of subsequent articles in the state and local public finance literature and has also been very influential in urban and regional economics the efficiency properties of various tiebout type models of local public good provision have been examined and the role of politics in these models has been debated at length in this literature of more direct relevance to this paper however is the fact that although tiebout had little to say directly about taxation simply assuming the existence of head taxes subsequent analyses have used adaptations of this model to examine the effects of local head taxes land taxes and property taxes it is the literature on the efficiency and distributional effects of alternative local taxes that is the subject of this survey 1

the selection principle and market failure in systems competition abstract if governments stepped in where markets failed reintroducing markets through the backdoor of systems competition will again result in market failure three models are presented which illustrate this wisdom the first is concerned with congestion prone public goods and shows that fiscal competition may be ruinous for the governments the second considers the insurance function of redistributive taxation and shows that systems competition may suffer from adverse selection the third studies the role of quality regulation and shows that systems competition may be a competition of laxity resulting in inefficiently low quality standards

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

mobility and redistribution the ability of individuals to move freely from one jurisdiction to another is generally seen as a constraint on the amount of redistribution that each jurisdiction within a system of governments can undertake in this paper we look at this proposition by developing a positive analysis of income redistribution by local governments in a federal system we ask how much redistribution occurs when only local governments can have tax transfer instruments individuals can move freely among jurisdictions and voters in each jurisdiction are fully aware of the migration effects of redistributive policies local redistribution is shown to induce sorting of the population with the poorest households located in the communities that provide the most redistribution while the threat of out migration affects the potential for redistribution our results suggest that significant local redistribution is nonetheless feasible numerical computations indicate that the proportion of residents who are renters is a major factor affecting the local choice of level of redistribution

tax competition and leviathan abstract attitudes towards downward pressure on tax rates from international tax competition depend on attitudes towards government this paper synthesises the two extremes which as in other areas of public finance have dominated the debate typically being presented as stark alternatives the view of government as a leviathan from which tax competition emerges as a useful constraint on policy makers and the view of government as a benevolent maximiser of their citizens welfare from which it emerges as a source of inefficiency conditions are derived under which when policy makers are neither entirely benevolent nor wholly self serving tax coordination benefits the representative citizen

spillovers stratification and inequality this paper surveys some recent work which seeks to model persistent income inequality and explain such phenomena as ghetto formation and poverty traps the paper illustrates how a number of these models possess a common structure in which local spillover effects interact with income based stratification of neighborhoods to transmit parental economic status from generation to generation as such these models represent an extension of the macroeconomic literature on spillovers and coordination failures to economic environments which endogenize the interaction environments of individual agents the theoretical and empirical justifications of these spillover and stratification effects are discussed finally some empirical implications of these models are analyzed

dynamic instability of a mixed city in the presence of neighborhood externalities it has been often asked whether a city currently accommodating a variety of economic social and racial groups will continue to be a mixed city or will become exclusively occupied by a single group particularly poor blacks with all other groups moving out of the city in the long run in order to answer this question properly it seems essential to develop a long run dynamic model of a city with emphasis on socioeconomic factors like neighborhood externalities within or among various groups of residents as well as spatial factors like the individual choice of residential space and location it might be safely said that in the literature the only theoretical work which employs a long run dynamic approach to this kind of problem is a paper on dynamic models of segregation by thomas schelling 197 1 although his socioeconomic analysis has revealed some of the dynamic properties of a racially mixed area with neighborhood externalities his model itself is quite unsatisfactory from the economic point of view since it lacks individual utility functions and thereby disregards the aspect of the individual choice of space and location within the city 2 as a result he failed to analyze the effect of spatial segregation within the city on the long run nature of the residential composition of the city in this paper i develop a long run dynamic model of an open city which accommodates two groups of households for example blacks and whites rich and poor young and old with their utility functions depending on a consumption good and residential space i also assume two kinds of neighborhood externalities the first is called negative intergroup externalities that is the utility level of a typical household in one group is adversely affected by an increase in the number of households in the other group living in the city the second is called positive intragroup externalities that is the utility level of a typical household in one group is positively affected by an increase in the size of its own group in in the city first i define a mixed city equilibrium as a long run equilibrium which allows the two groups to coexist in the city in the long run and then introduce a dynamic adjustment process of household movement into and out of the city it is proved that the mixed city equilibrium is always unstable in the presence of negative intergroup externalities and or positive intragroup externalities if residential land is perfectly homogeneous and there is no differential transport cost incurred within the city it turns out however that in the case of a monocentric city with positive transport cost the mixed city equilibrium may be stable or unstable depending on the degree of neighborhood externalities because of the stabilizing effect of spatial segregation between the two groups within the city

equity and efficiency in human capital investment the local connection a general model of community formation and human capital accumulation with social spillovers and decentralized school funding is used to analyse the causes of economic segregation and its consequences for equity and efficiency significant polarization arises from minor differences in endowments preferences or access to capital markets this makes income inequality more persistent across generations but the same need not be true for wealth equilibrium stratification tends to be excessive resulting in low aggregate surplus whether state equalization of school resources can remedy these problems hinges on how purchased social and family inputs interact in education and in mobility decisions

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

price search in a product market regressions using panel data on grocery purchases show lower purchase costs are significantly associated with a larger number of stores visited per week there is also evidence but somewhat weaker of diminishing gains from such search an economic model of the determinants of search suggests that prices paid quantities purchased and number of store visits are interrelated a view supported by results of estimating a proposed simultaneous equations model

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

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

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

determinants of store level price elasticity using weekly scanner data representing 18 product categories the authors estimated store specific price elasticities for a chain of 83 supermarkets they related these price sensitivities to a com

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed