Tiebout model
Encyclopedia
The Tiebout model, also known as Tiebout sorting, Tiebout migration, or Tiebout hypothesis, is a positive political theory
model first described by economist Charles Tiebout
in his article "A Pure Theory of Local Expenditures" (1956). The essence of the model is that there is in fact a non-political solution to the free rider problem
in local governance.
Tiebout first proposed the model informally as a graduate student in a seminar with Richard Musgrave
, who argued that the free rider problem necessarily required a political solution. Later after obtaining his PhD, Tiebout fully described his hypothesis in a seminal article published in 1956 by the Journal of Political Economy
.
Tiebout describes municipalities within a region as offering varying baskets of goods (government services) at a variety of prices (tax rates). Given that individuals have differing personal valuations on these services and varying ability to pay the attendant taxes, individuals will move from one local community to another until they find the one which maximizes their personal utility. The model states that through the choice process of individuals, jurisdictions and residents will determine an equilibrium
provision of local public good
s in accord with the tastes of residents, thereby sorting the population into optimum communities. The model has the benefit of solving two major problems with government provision of public goods: preference revelation
and preference aggregation.
The Tiebout model relies on a set of basic assumptions. The primary assumptions are that consumers are free to choose their communities, enjoying perfect mobility and perfect information. This essentially means that they can move from community to community at no cost, and that they know everything they need to know about services provided by local governments and the tax rates of all local governments. The Tiebout model has been shown to be most accurate in suburban areas with many different independent communities. Moving between communities in these areas tends to have the lowest costs, and the set of possible choices is very diverse. In areas subject to rural flooding, Tiebout sorting explains why more affluent residents live in communities protected by river levees, while poorer residents tend to live without those expensive and rarely utilized protections.
The exact assumptions Tiebout made in his first statement of the model were:
Positive political theory
Positive political theory or explanatory political theory is the study of politics using formal methods such as social choice theory, game theory, and statistical analysis. In particular, social choice theoretic methods are often used to describe and analyze the performance of rules or institutions...
model first described by economist Charles Tiebout
Charles Tiebout
Charles Mills Tiebout was an economist and geographer most known for his development of the Tiebout model, which suggested that there were actually non-political solutions to the free rider problem in local governance. Graduated Wesleyan University in 1950, received PhD in economics in University...
in his article "A Pure Theory of Local Expenditures" (1956). The essence of the model is that there is in fact a non-political solution to the free rider problem
Free rider problem
In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...
in local governance.
Tiebout first proposed the model informally as a graduate student in a seminar with Richard Musgrave
Richard Musgrave
Richard Abel Musgrave was an American economist of German heritage. His most cited work is The Theory of Public Finance , described as "the first English-language treatise in the field."-Life:...
, who argued that the free rider problem necessarily required a political solution. Later after obtaining his PhD, Tiebout fully described his hypothesis in a seminal article published in 1956 by the Journal of Political Economy
Journal of Political Economy
The Journal of Political Economy is an academic journal run by economists at the University of Chicago and published every two months by the University of Chicago Press. The journal publishes articles in both theoretical economics and empirical economics...
.
Tiebout describes municipalities within a region as offering varying baskets of goods (government services) at a variety of prices (tax rates). Given that individuals have differing personal valuations on these services and varying ability to pay the attendant taxes, individuals will move from one local community to another until they find the one which maximizes their personal utility. The model states that through the choice process of individuals, jurisdictions and residents will determine an equilibrium
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
provision of local public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
s in accord with the tastes of residents, thereby sorting the population into optimum communities. The model has the benefit of solving two major problems with government provision of public goods: preference revelation
Revealed preference
Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits...
and preference aggregation.
The Tiebout model relies on a set of basic assumptions. The primary assumptions are that consumers are free to choose their communities, enjoying perfect mobility and perfect information. This essentially means that they can move from community to community at no cost, and that they know everything they need to know about services provided by local governments and the tax rates of all local governments. The Tiebout model has been shown to be most accurate in suburban areas with many different independent communities. Moving between communities in these areas tends to have the lowest costs, and the set of possible choices is very diverse. In areas subject to rural flooding, Tiebout sorting explains why more affluent residents live in communities protected by river levees, while poorer residents tend to live without those expensive and rarely utilized protections.
The exact assumptions Tiebout made in his first statement of the model were:
- Mobile Consumers: Consumers are free to choose where they live. There are no costs associated with moving.
- Complete information.
- Many communities to choose from.
- Commuting is not an issue.
- Public Goods do not spill over in terms of benefits/costs from one community to the next.
- An optimal city size exists: Economies of scale.
- Communities try to achieve "optimal size".
- Communities are rational and try to keep the public 'bad' consumers away.