METROPOLITAN FRAGMENTATION AND LOCAL PUBLIC EXPENDITURES

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Abstract
Household demands for public goods are estimated and used to test three hypotheses: (1) the Tiebout hypothesis, which implies that all households within a community have similar demands for publicly provided goods, which in turn reflects the absence of variation in the underlying income and house prices within the community; (2) the Lindahl model, which suggests that communities consist of households with similar public goods demands despite variations in their income or tax prices, (3) strategic fiscal behavior in which households attempt to form communities such that intra-community redistribution is avoided. Very wide variation in demands for public goods is found within communities. There is also evidence that despite substantial income heterogeneity, there is some effort to reduce intra-community redistribution.

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