ARTICLE

The Tiebout Hypothesis asserts that, when it is efficient to have multiple jurisdictions providing local public goods, then competition between jurisdictions for residents will lead to a near-optimal outcome. Research from cooperative game theory both provides a foundation for the hypothesis and extends the hypothesis to diverse situations where small groups of participants are effective.

The Tiebout Hypothesis (1) asserts that, in economic situations where it is optimal to have many jurisdictions offering competing packages of public goods, the movement of consumers to jurisdictions where their wants are best satisfied and competition between jurisdictions for residents will lead to near-optimal, "market-like" outcomes. A jurisdiction (or club) is a group of individuals who collectively provide public goods for themselves exclusively (the public goods are local). Tiebout also suggested that individuals would sort into taste-homogeneous jurisdictions.

This article primarily reports on research interpreting and extending the Tiebout Hypothesis through cooperative game theory: in large economies with relatively small effective coalitions, there are outcomes in the core, that is, there are feasible states of the economy that cannot be improved upon by any coalition. (Note that a coalition may consist of many jurisdictions.) Moreover, the core has the equal treatment propertyoutcomes in the core do not discriminate between identical individuals, a "market-like" feature. When the effect of an individual on others is determined by his crowding type (his observable characteristics, including profession, appearance, age, gender, and lifestyle), the core dictates not only that identical individuals are treated identically but also that, in their interactions with others, individuals with the same crowding types are treated equally (2-4). These features all are in stark contrast to the situation with pure public goods (such as radio or national defense), for which relatively small jurisdictions are inefficient.

The results apply more broadly . . . [Full Text of this Article]