Establishing The Micro Foundations of a Macro Theory: Information, Movers, and the Competitive Local Market for Public Goods

Abstract

The Tiebout model of competition in the local market for public goods is an important and controversial theory. The current debate revolves around the apparent disparity between macro empirical studies that show greater efficiency in the supply of public goods in polycentric regions compared to consolidated ones and micro evidence of widespread citizen-consumer ignorance, which has been used to argue that individual actions cannot plausibly lead to efficiency-enhancing competition between local governments. We argue that competitive markets can be driven by a subset of informed consumers who shop around between alternate suppliers and produce pressure for competitive outcomes from which all consumers benefit. Using data from a survey of over five hundred households, we analyze the role of these marginal citizen-consumers and incorporate the costs of information gathering and the strategic interests of local governments into the competitive market model.