The effect of spillovers and congestion on the endogenous formation of jurisdictions∗

This paper analyzes the effect of inter-jurisdictional spillovers and congestion of local public services on the segregative properties of endogenous formation of jurisdictions. Households choosing to live at the same place form a jurisdiction, the aim of which is to produce congested local public services, resulting in generate positive spillovers to other jurisdictions. In every jurisdiction, the production of the local public services is financed through a local tax based on households’ wealth. Local wealth tax rates are democratically determined in every jurisdiction. Households consume the available amount of public services in their jurisdiction and a composite private good. Any household is free to leave its jurisdiction for another that would increase its utility. A necessary and sufficient condition to have every stable jurisdiction structure segregated by wealth is identified: the public services must be either a gross substitute or a gross complement to the private good. JEL Classification: C78; D02; H73; R13