Existence of Equilibrium and Stratification in Local and Hierarchical Tiebout Economies with Property Taxes and Voting

We present the first fully closed general equilibrium model of hierarchical and local public goods economies with the following features: (i) multiple agent types who are endowed with both some amount of private good (income) and a house, who are mobile between houses and jurisdictions, and who vote in local and national elections; (ii) multiple communities that finance a local public good through property taxes which are set in accordance with absolute majority rule; and (iii) a national government that produces a national public good financed through an income tax whose level is determined through majority rule voting. In contrast to previous models, no overly restrictive assumptions on preferences and technologies are required to prove the existence of an equilibrium in the presence of property taxation and voting. Thus, the existence of an equilibrium is proved without any of the major restrictions used in the past, and sufficient conditions for stratification of agents into communities based on their public good preferences and their wealth levels are found. This model lays the groundwork for a positive applied analysis of local public finance and intergovernmental relations. It furthermore builds the foundation for a parameterized computable general equilibrium model of local public goods and fiscal federalism that is used elsewhere to analyze a variety of policy issues.