AN EXPERIMENTAL ANALYSIS OF THE TIEBOUT’S MODEL IN A DECENTRALIZED SYSTEM OF PUBLIC GOODS PROVISION Behavioural and Experimental Economics Workshop I Workshop degli Economisti Sperimentali e Comportamentali Italiani, Florence may Alessandro Innocenti, Siena University Chiara Rapallini, Firenze University

Summary 2 Aim- is to provide experimental evidence on the Tiebout efficiency- enhancing property in a decentralized system of public goods provision Object - a test of the Tiebout model in order to assess if decentralization and local sorting produces efficiency gains Key finding – we show that the model fails because residents are different, not only in their preferences on local public goods, but also because voting and moving are not equally shared.

Talk outline 3 1. The Tiebout model (1956) and the recent contribution by Rodhe and Strumpf (American Economic Review, 2003) 2. The experimental design 3. Results 4. Preliminary conclusions

The Tiebout Model Tiebout’s (1956) model shows that if a sufficient number of local communities exists to accommodate different types of preferences, individuals could move to that community whose local governments best satisfies his set of preferences (pattern of expenditures and taxes). Quoting Oates (1969) “Tiebout’s world is one in which the consumer “shops” among different communities offering varying packages of local public services and selects as a residence the community which offers the tax-expenditure program best suited to his tastes”.

The Tiebout Model This is the so called voting by feet: if households are free to move, people effectively sort themselves into groups that are homogeneous with respect to their demands for local services.

More recently Since 1956, there is a wealth of literature surrounding the Tiebout hypothesis, both from an empirical and a theoretical point of view. Rodhe and Strumpf (American Economic Review, 2003) argue that long–run trends in geographical segregation are inconsistent with choice model where residential choices depends solely on local public goods More precisely they demonstrate that the secular decline in the mobility costs is not matched with an increase in the heterogeneity in local public policies

Rhode and Stumpf (AER, 2003) Some example of mobility costs historical data - CAR: in 1903 to drive a car cost 143,8 cents/mile in 1998 dollars, while in ,9 cents; - TRAIN: a passenger mile cost 37,4 cents in 1895 and 13,4 cents in 1995; - AIR: a passenger mile cost 108 cents in 1929 vs. 13,7 cents in 1995; - 3 minute of transcontinental call in January 1915 cost 20,70$ in current dollars, which was almost 314$ in 1998 dollars.

Rhode and Stumpf (AER, 2003) Data on a sample of US municipalities ( ), all Boston- area municipalities ( ) and all US counties ( ) show that municipal per capita taxes, school district per capita taxes, total spending, protection spending etc. incomes and racial composition are now less differentiate across local communities than in the past.

Rhode and Stumpf (AER, 2003) They explain their result with the following reasons: 1. growing federal role in providing public services 2. zoning policies are more and more popular after the war, avoiding the poor-chasing-the-rich phenomenon 3. growing local government competition (to have the same category of residents: the richer !)

Our explanation In our paper we test a fourth reason of the phenomenon observed. We show that the Tiebout model fails because residents are different, not only in their preferences on local public goods, but also because voting and moving are not equally shared.

The experimental desing 3 sessions 10 rounds for each session Initially 15 undergraduate students randomly allocated in 5 communities playing cards randomly assigned to each student for the whole experiment the 4 different suits of cards (hearts, diamonds, clubs, spades) represent types of public goods the number over the cards determine the preferences over public goods Each community is allowed to provide only one public good

The experimental design The individual welfare related to the public good provision is the difference between individual benefit and individual cost. For each student, the benefit of the public good provided in his/her community, is the minimum between the provision level and his/her sum of cards of that type. The community production cost is equal to the quantity produced (we assume constant and unitary costs). The total cost is shared equally among the members of the community, i.e. individual cost is equal to the community cost divided by the members.

The experimental design In each community there is a person ( the dictator) who decides the type of public good and the amount to produce The others can only move. They decide knowing the good produced by the proper and the other communities Each community decides in each of the 10 rounds of the session, both the type of public good and the amount to produce The decision is taken by the majority of votes The dictator designThe democracy design

Total welfare

Cost per capita (in average)

Quantity produced (in average)

Preliminary conclusions  total welfare is always higher in the democracy design, i.e. voting by feet increases efficiency if voting by ballot is equally shared  in democracy cost per capita increases in the first part of the session, but it decreases after the 5 th -6 th rounds; at the end of all the three sessions, the average cost per capita in the dictator design is higher  the comparison between the quantity produced in the two designs doesn’t show any trend

More in deep…

More in deep 1. The number of individual moving is positively related with the increase in individual welfare between the 1 st and the 10 th rounds in the democracy design; in the dictator design in two of three session 2. Under democracy, the welfare increase is negatively related with the number of rounds in which each individual met a person with a CS of the opposite sign, while in the dictator design this variable is not significant or positively related with the welfare. That means that voting by feet may enhance welfare, by reducing heterogeneity among members of the same community if all that people has the right to vote.

More in deep 1. The previous result is confirmed by the coefficient of the dummy indicative of “at least two people with a different CS” 2. In the dictator design the increase in welfare is positively related with a right decision on moving/non moving only if the community is correctly chosen, while in the democracy design there is a positive coefficient if the moving/non moving decision is rightly taken.

More in depth into the moving decision

1. an individual loss in the previous round is always significant of the decision to move both in democracy and in the dictator design 2. in 4 over 6 sessions most of the moving decisions are taken in the first five rounds 3. in the democracy design the decision to move is influenced by the presence of different people in one’s own community (session 1) or if the collective decision on the type and quantity of good is different from one’s own vote (session 2)

Main conclusions Total welfare is always higher in democracy, i.e. voting by feet increases efficiency if voting by ballot is equally shared among residents under democracy increasing in individual welfare is positively related with the number of moving decisions taken the democracy process succeed in decreasing average cost per capita for public goods better than in the dictator framework

Main conclusions In democracy, the welfare increase is negatively related with the heterogeneity of people in each community, while in the dictator design this variable is not significant In the dictator design the increase in welfare is positively related with a right decision on moving/non moving only if the community is correctly chosen, while in the democracy design there is a positive coefficient if the moving/non moving decision is rightly taken.