60 years later and still going strong: The continued relevance of the Tiebout Hypothesis

1. IntroductionIt has been sixty years since "A Pure Theory of Local Expenditures" was published by Charles Tiebout (1956) in the Journal of Political Economy. His paper provides both theory and evidence that people "vote" for the optimal share of public goods with their feet. Voting is the decision to move to a community that has their desired level of public goods. This theory became known as the Tiebout Hypothesis. Since 1956, there were hundreds of papers published in economic, social science, and regional science journals that set out to test the many implications of the Tiebout Hypothesis using different methodologies, disaggregating migration flows by different groups of people, distinguishing between in-migration and out-migration, adding in additional explanatory variables, and distinguishing between different types of local government expenditure. Based on current debates in this area, the Tiebout Hypothesis appears as relevant to today's political economy as it was 60 years ago.Tiebout's paper was groundbreaking because up to that time the standard belief among most economists was that there was no free market solution for the optimal allocation of public goods. Tiebout agrees with Musgrave (1939) and Samuelson (1954) that there is only a "political" solution for the allocation of federal government expenditures, but argues for the occurrence of "sorting," i.e., people moving freely among different communities will choose the community that best suits their preference for local government expenditures and taxes. Thus, people vote for public goods and their financing with their feet. He argues that the Musgrave and Samuelson approach is valid for federal government expenditures because the federal government represents all people in the United States. However, applying the Tiebout Hypothesis to other countries was fraught with much higher barriers, such as differences in culture and political structure, so the international applications are limited.There were eight key assumptions Tiebout (1956) made in his model: (1) consumer-voters are fully mobile and will move to that community where their preferences are best met; (2) consumers have complete knowledge of revenues and expenditures on public goods in every community and will react to those differences; (3) there are many communities to choose from; (4) employment is not an issue to consider; (5) public goods accrue only to the community paying for them; (6) communities grow to take advantage of economies of scale in the provision of public goods; and (7) communities try to grow or contract to maintain optimal size.Even Tiebout (1956) realizes that perfect sorting of consumer-voters would not be achieved because of the realities such as limited job opportunities, consumer voters not having total knowledge of the choices of public goods in all communities, limits to mobility, moving costs, etc. Tiebout postulated his model as a conceptual solution to Samuelson's (1954) dilemma:However no decentralized pricing system can serve to determine optimally these levels of collective consumption. Other kinds of "voting" or "signaling" would have to be tried. (Samuelson, 1954, pp. 388)Thus, testing the Tiebout Hypothesis is about looking for evidence of the type of signaling Tiebout proposes in his 1956 paper. It is unreasonable to expect to find complete Tiebout sorting such that all people in a community have exactly the same set of preferences for collective goods. Community members are constrained by limited job opportunities, high moving costs, lack of knowledge, or other barriers to moving to where their preferences can be fully met.It is precisely because of the constraints discussed above that most studies empirically test for evidence of Tiebout sorting. Sorting includes control variables to account for employment opportunities (variables such as the unemployment rate and per capita income, for example), moving costs (such as distance), and other attractive local characteristics (such as climate variables, cost of living, etc. …