Tiebout’s Tale in Spatial Economies: Entrepreneurship, Self-Selection, and Efficiency∗

This paper establishes the existence and efficiency of equilibrium in a local public goods economy with spatial structures by formalizing Hamilton’s (1975 Urban Studies) elaboration of Tiebout’s (1956 JPE) tale. We use a well-known equilibrium concept from Rothschild and Stiglitz (1976, QJE) in a market with asymmetric information, and show that Hamilton’s zoning policy plays an essential role in proving the existence and efficiency of equilibrium. We use an idealized large economy following Ellickson, Grodal, Scotchmer and Zame (1999, Econometrica) and Allouch, Conley and Wooders (2004). Our theorem is directly applicable to the existence and efficiency of a discrete spatial approximation of monoor multi-centric city equilibria in an urban economy with commuting time costs, even if we allow the existence of multiple qualities of (collective) residences, when externalities due to traffic congestion are not present. ∗I thank Jan Brueckner, John Conley, Masa Fujita, Atsushi Kajii, Kazuya Kamiya, Se-il Mun, Jaime Luque, Frederic Robert-Nicoud, Alain Trannoy, and Myrna Wooders for their comments and encouragements, and Frank Georges for his research assistance. I especially thank two anonymous referees and an associate editor of the journal for their helpful comments and suggestions. My intellectual debt to Marcus Berliant is obvious. All errors are, of course, my own. †Department of Economics, Boston College [email protected]