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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 believes that the local governments have a more precise and detailed knowledge of the needs of the local population, thus making them more readily able to accurately tax the people on the goods and services it provides to the local population. He later 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 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 goods 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.
Tiebout's paper argues that municipalities have two roads that they can go about in trying to acquire more persons in their community. One route is for the municipalities to act as a cartel, enforcing a singular tax rate among the various communities. In his paper, Tiebout claims this would shrink the right of voice and exit to the individual. The other option is for the municipalities to engage in tax competition. Tiebout claims the end result of both options is the same, as the tax rates of the various municipalities would converge around an average rate. Tax competition for Tiebout was an integral part of the market process between the government and its citizens.
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, who 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.