Mobility and Capitalization in Local Public Finance: A Reassessment

David A. Starrett
1998 Social Science Research Network  
We examine models of local public finance in which separated communities offer different development packages and agents choose among these. We challenge the prevailing view that mobility of agents imposes the correct development incentives on communities through effects on land values. We develop an alternative theory of migration incentives and show that it generates an incentive to overdevelop in that it leads to communities that are too congested relative to a first best ideal. The main
more » ... ideal. The main paradigm in local public finance has two features which have been up until now relatively uncontroversial, but which taken together have very strong implications for welfare economics. These assumptions are (1) free mobility among communities and (2) insulation of one community from the actions taken by other communities. In their strongest versions, these two assumptions interact to guarantee that local public decision-making cannot make anyone worse off and under weak behavioral assumptions must lead to a Pareto efficient outcome.
doi:10.2139/ssrn.82128 fatcat:xus6ceuzhbdtnmt2x7u7jkbk2i