THE TIEBOUT MODEL: A Theoretical Defense of Privatist Approach Charles Tiebout published in 1956 an article entitled “A Pure Theory of Local Expenditures”[1]. The article, fairly brief in pages, has generated several literatures on various aspects or “take away” and any attempt to have a go at all of them is, well, silly. For our purposes, two concepts have impacted economic development in surprisingly conflict ways. The paper was intended by Tiebout to counter a Robert Samuelson argument that free riders create imperfections in private markets which require governmental intervention[2]. Tiebout believed that at the local level, the city, a mechanism, actually two, could correct the free rider problem: exit strategies of citizens and optimum size of cities.
Since we are not especially concerned with free riders in our history of economic development, we focus on his two conceptual solutions and seek a sense of how they could affect local economic development. Tiebout sees a city (a political jurisdiction) as providing a basket of services desired by its citizens. It could be said that providing this basket of services is the function of the city–why the city exists in the first place. Writing as he does in the fifties, previous to the era of significant intergovernmental transfers, grants from federal and state are not meaningful to local finance, Therefore, Tiebout assumes the city must find ways to pay for these services from their own source revenues–the local tax base. The basket size and cost can vary among cities on the basis of varying priorities and intensity of citizen demands; there will be cities whose citizens demand high cost baskets and cities whose tax payers demand low cost baskets. Relative to the cost of the basket of services Tiebout believes (because there is no way to prove this concept) that an optimum size (population) for that city will exist in which taxes generated from that population will provide the level of funds needed for the basket of services. Cities then seek to reach population levels which reflect that optimum size.
The need to achieve-maintain optimum size suggests cities will make efforts to attract, and logically expel, population. Even Tiebout admits that attraction is much more commonsensical and cities rarely, if ever, deliberately expel citizens (“no alderman in his right political mind would ever admit that the city is too big”) in excess of the city’s optimum size. Hence Tiebout’s second concept: citizen exit. First, if the basket of services does not match the citizen’s needs or expectations, the citizen is free to move about and find another city-basket which is more acceptable. Second, if the tax-services ratio is out of order (usually the citizen pays more taxes than his or her basket of goods would seem to require) then the citizen is also free to exit the jurisdiction. At any given point of time, there are likely to be a number of cities with all sorts of baskets and tax levels and so citizens have choice if they decide their existing jurisdiction’s basket-tax balance is out of order. Individuals and households reveal their preferences for baskets and level of taxes, in effect by voting “with their feet”. Logically, over time, if there is any rationality to this optimum size and exit stuff, jurisdictions will attract citizen-residents who are relatively homogeneous or at least think alike.
Communities below the optimum size seek to attract new residents to lower average costs. Those above optimum size do just the opposite. Those at an optimum try to keep their populations constant.[3]
What Tiebout is describing is a much decentralized “system” of cities; each individual city determining (presumably through their public policy process–although Tiebout might not agree with that) what goes into the basket and what level of taxes need be paid. Dissatisfaction breeds exit but also presumably attraction of those who value the basket-tax balance. In this decentralized system of municipal jurisdictions a choice exists among public policy outputs and levels of taxation and, one might postulate, that each city is its own private market. If there are not sufficient numbers of residents-citizens attracted to a city’s basket-tax balance then it will probably over tax its current residents because it cannot reach its optimum size and they too will exit. If too many citizens arrive, the costs of the basket will increase and the optimum size will be exceeded and drive some citizens out when the basket is adjusted.
There is a raft of thoughts which arise from Tiebout. First, however, let’s deal with the obvious issues. How does anyone define what the optimum size is? Don’t bother! No one but the most diehard mathematical economist thinks it can be done. We can say in its defense that whatever optimum size is in terms of actual size probably matters little because the individual calculations of each household will cause exit or attraction and the cumulative effect of these individual calculations will, if demand is sufficient, hover around some population level relative to tax level.
Certainly, there are a number of “irrational” factors which complicate or intrude into Tiebout’s very rational economist approach: Family, kids in school, “wait till the next election and my guy gets voted into office syndrome”, hometown identity-loyalty, occupational constraints, even age. Also, economic factors enter the rational calculation, including moving costs, underwater mortgage, inability to adequately-comfortably measure the basket-tax balance, and marginal utility of various elements of each basket. One could argue that the exit choice is the one least made, and the default choice of most residents is to stay where they were–which in any given year is exactly what happens.
Still Tiebout sheds some light into the competitive environment of a city and the need for it to provide the basket of goods desired by its citizens. He also demonstrates the value inherent in both a personal choice driven free market system and our federalist system which permits alternative municipal level baskets of goods. In the fifties in which he published, Tiebout provided an obvious, and a quite reasonable answer, as to why residents were leaving the central city for the suburbs. Tiebout definitely exposes the importance and the value of population mobility.
How does Tiebout fit into our two stream schema? The key to that answer is to remember our original statement that Tiebout’s purpose in writing the article was to counter Samuelson, a Progressive in our perspective. Samuelson’s asserts that because of free riders government needed to correct the inefficiencies of the free market system by providing public goods which the free market system, on its own, would not. Tiebout hopes to demonstrate that at the local level this concern does not apply and a wonderful exit choice removes the need for a strong compensatory government role. On top of this, without his really trying to do so, the picture he paints corresponds strongly to our conception of the Privatist-Anti-Federal, decentralized stream. In Tiebout’s world, for instance, the flight to the suburb from the central city can be a rational calculation (not a racially driven exodus) and the suburbs instead of being the root of all evil and banality emerge as the winners in the rational choice-calculation contest. Tiebout’s implications and images are not the way into a Progressive’s heart[4].
It’s a Wonderful Life
In 1946 Frank Capra’s “It’s a Wonderful Life” was released. Known as a Christmas show, it, like Dickens’ Christmas Carol is in fact a movie whose central theme is our two ships: Privatism and Progressivism. Interestingly they both, in the Curmudgeon’s mind, arrive at essentially the same conclusion–the ending “wisdom” presented in the last chapter of “As Two Ships Passing in the Night”. Let’s dissect the economic development wisdom contained in Capra’s movie.
Community and individual empowerment through housing and finance–Bailey Park an affordable housing complex–he save’s his bank by appealing to people to not withdraw so that he can compete against Privatist Potter and keep him in check. Due to his warm, well-intentioned and loyal but bumbling bureaucracy plus his chronic inability to achieve a sustainable business model, the bank fails yet again—and is saved by an angel. Works for me!
The privatist alternative in Pottersville–robber baron heartless capitalism which corrodes the human spirit and degrades morals–what happens without Bailey keeping Potter in check is revealed by Angel Clarence who bails out Bailey (literally). But in every instance, Bailey is saved from himself either by the evils of Privatism directly or by those using the rewards of involvement in the Privatist world—philanthropy.
They need each other to survive–compete and complement a pair of dimes makes a paradigm
[1] Charles M. Tiebout, “A Pure Theory of Local Expenditures”. Journal of Political Economy, Vol. 64, pp. 416-424. See also, The Tiebout Model at Fifty, William A. Fischel (Ed), Land Lines, Lincoln Institute of Land Policy, 2006.
[2] Robert Samuelson, The Pure Theory of Public Expenditures”,
[3] Tiebout, op. cit. p. 419
[4] Tiebout died prematurely from a sudden heart attack in 1964; he was 43. At the time he was in the Geography
department at the University of Washington. Tiebout was at Northwestern when he published his famous article. Tiebout’s model was far from fully developed, full of holes some would say, but it certainly “caught on” and has become a must read in our profession. Having said, that, the Curmudgeon would also urge the reader consider Wallace Oakes who in a lifetime of articles refined Tiebout and extended his argument in many valuable directions, such as zoning and political governance of cities. We included in our original citation a good starting point for Oakes.
Ron W. Coan 