Tiebout Model

A reply to Samuelson

Paul Samuelson (1954) argued that because public goods are nonrival and hard to exclude, people conceal their preferences and free ride, so public goods cannot be supplied efficiently through a market-like process. In "A Pure Theory of Local Expenditures" (1956), the young economist Charles Tiebout replied that for local public goods at least there is a solution. If many local governments offer different packages of taxes and services such as schools, parks and policing, residents reveal their preferences by moving to the community that best fits them: they vote with their feet. Communities compete for residents, people with similar preferences cluster together, and each community supplies the quantity of public goods its residents want. The paper became a classic of public choice and fiscal decentralization.

Assumptions and evidence

Tiebout's conclusion rests on strong assumptions: (1) full mobility of residents, (2) complete information about taxes and services, (3) a large number of communities, (4) no employment constraints, with residents living on dividend income, (5) no spillovers or externalities between communities, (6) an optimal community size, and (7) entry and exit of communities toward that size. Wallace Oates (1969) used New Jersey data to show that better schools and lower property taxes are capitalized into house prices, indirectly supporting the mechanism. Black (1999) estimated the value of school quality from price differences across attendance-zone boundaries, and Hoxby (2000) reported better public-school performance in metro areas with more districts. Banzhaf and Walsh (2008) directly confirmed voting with the feet by showing population inflows to areas where air pollution improved.

Critiques and policy implications

Critics note that real residents cannot move easily because of jobs, family and moving costs, and that information is imperfect. Bewley (1981) showed that under rigorous conditions a Tiebout equilibrium may not be efficient. A more serious concern is equity: as Hamilton (1975) noted, wealthy communities can use zoning to exclude lower-income residents, deepening income segregation and school inequality. Fischel's (2001) homevoter hypothesis explains how homeowners protecting property values dominate local politics. Even so, together with Oates's (1972) decentralization theorem, the Tiebout model became a theoretical foundation of fiscal federalism. In Albert Hirschman's (1970) exit-and-voice framework, the Tiebout model represents exit while the median voter theorem represents voice. The model also informs debates over regional decline, school-district demand and local tax competition.

FAQ

What is the Tiebout model in simple terms?

When people move to neighborhoods whose taxes and services such as schools and parks they like, local governments compete and public services are supplied efficiently.

What is the biggest problem with the Tiebout model?

Besides the fact that moving is costly, wealthy communities can exclude lower-income households, worsening residential segregation and educational inequality.

Sources reviewed: 2026-10-26

References

1. Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64(5), 416–424.
2. Oates, W. E. (1969). The effects of property taxes and local public spending on property values. Journal of Political Economy, 77(6), 957–971.
3. Oates, W. E. (1972). Fiscal Federalism. New York: Harcourt Brace Jovanovich.
4. Samuelson, P. A. (1954). The pure theory of public expenditure. Review of Economics and Statistics, 36(4), 387–389.
5. Hamilton, B. W. (1975). Zoning and property taxation in a system of local governments. Urban Studies, 12(2), 205–211.
6. Bewley, T. F. (1981). A critique of Tiebout's theory of local public expenditures. Econometrica, 49(3), 713–740.
7. Fischel, W. A. (2001). The Homevoter Hypothesis. Cambridge, MA: Harvard University Press.
8. Banzhaf, H. S., & Walsh, R. P. (2008). Do people vote with their feet? An empirical test of Tiebout's mechanism. American Economic Review, 98(3), 843–863.
9. Dowding, K., John, P., & Biggs, S. (1994). Tiebout: A survey of the empirical literature. Urban Studies, 31(4–5), 767–797.
10. Hoxby, C. M. (2000). Does competition among public schools benefit students and taxpayers? American Economic Review, 90(5), 1209–1238.
11. Black, S. E. (1999). Do better schools matter? Parental valuation of elementary education. Quarterly Journal of Economics, 114(2), 577–599.
12. Oates, W. E. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37(3), 1120–1149.
13. Hirschman, A. O. (1970). Exit, Voice, and Loyalty. Cambridge, MA: Harvard University Press.