Oates' Decentralization theorem with Imperfect Household Mobility

Francis Bloch (1, 2) , Unal Zenginobuz (3)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics
3 Bogazici Universitesi

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.

Mots clés: Spillovers; Tax competition; Oates' decentralization theorem; Fiscal federalism; Household mobility

Domaines: Economies et finances

Francis Bloch, Unal Zenginobuz. Oates' Decentralization theorem with Imperfect Household Mobility. International Tax and Public Finance, 2015, 22 (3), pp.353-375. ⟨10.1007/s10797-014-9311-6⟩. ⟨hal-01012721⟩