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International Tax and Public Finance
Published in: International Tax and Public Finance 3/2015

01-06-2015

Oates’ decentralization theorem with imperfect household mobility

Authors: Francis Bloch, Ünal Zenginobuz

Published in: International Tax and Public Finance | Issue 3/2015

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Abstract

This paper studies how Oates’ trade-off between centralized and decentralized public good provision is affected by changes in households’ mobility. We show that an increase in household mobility favors centralization. This results from two effects. First, mobility increases competition between jurisdictions in the decentralized régime, resulting in lower levels of public good provision. Second, while tyranny of the majority creates a gap between social welfare in different jurisdictions in the centralized régime, mobility allows agents to move to the majority jurisdiction, raising average social welfare. Our main result is obtained in a baseline model where jurisdictions first choose taxes, and households move in response to tax levels. We show that the result is robust to changes in the objective function and the strategic variable of local governments.
next article A structural approach for analyzing fiscal equalization

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Appendix
Available only for authorised users
Footnotes
1
Eurostat: Migration and migrant population statistics, October 2011.
 
2
Dustmann et al. (2010) report that the share of immigrants from accession countries as a proportion of the UK working-age population increased from 0.01 to 1.3 % by the beginning of 2009.
 
3
Notice, however, that this effect of mobility on public good provision only arises when jurisdictions take into account the effect of their choice of tax/public good packages on mobility. Hence, in order to capture this effect, we construct a sequential model where jurisdictions choose their tax/public good package in the first stage, and households move in the second stage.
 
4
See Besley and Coate (2003), Koethenbuerger (2008) and Lockwood (2008) for other examples where welfare is non-monotonic in the level of spillovers and the choice between centralization and decentralization is sometimes counterintuitive.
 
5
See Epple and Nechyba (2004) and Boadway and Tremblay (2011) for surveys of the literature. Besley and Coate (2003) and Janeba and Wilson (2011) mention the study of Oates’ theorem under household mobility as an important issue to be addressed.
 
6
This is the same spillover model as the one studied by Bloch and Zenginobuz (2006, 2007).
 
7
In our earlier work (Bloch and Zenginobuz 2006, 2007), we analyzed the Tiebout equilibria of the same model of public good provision with spillovers, but did not restrict attention to symmetric equilibria. Notice also that the same independence result obtains if, instead of considering a model of simultaneous mobility and taxation decisions, we analyzed a model of “slow” migration where agents choose their jurisdiction before jurisdictions choose taxation levels (Mitsui and Sato (2001) and Hoel (2004)). In that case, as in the Tiebout model, at a symmetric equilibrium, \( n_{1}=n_{2}=1\), and the equilibrium choice of jurisdictions \(g^{*}\) is independent of \(\lambda \).
 
8
Jehiel and Scotchmer (2001) also adopt this refinement to abstract from coordination failures.
 
9
When the two jurisdictions are of equal size, we break ties by assuming that jurisdiction 1 holds the majority.
 
10
Observe that the solutions to Eqs. 10 and 11 are identical in the quasi-linear model; hence, the equality of equilibrium tax levels for the pure public good and the local public good cases.
 
11
By contrast, Besley and Coate (2003) implicitly assume that the technology of public good provision involves diseconomies of scale, so that the majority jurisdiction optimally chooses to provide positive amounts of public goods in both jurisdictions.
 
12
Wildasin (1991) and Koethenbuerger (2012) also compare the equilibria of games where local jurisdictions choose different strategic variables. In particular, they analyze the difference between taxation of mobile and immobile factors.
 
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Metadata
Title
Oates’ decentralization theorem with imperfect household mobility
Authors
Francis Bloch
Ünal Zenginobuz
Publication date
01-06-2015
Publisher
Springer US
Published in
International Tax and Public Finance / Issue 3/2015
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI
https://doi.org/10.1007/s10797-014-9311-6

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