DP2273 The New Federalism: Distributional Conflict, Voluntarism and Segregation

Author(s): Ignatius J Horstmann, Kimberley Scharf
Publication Date: October 1999
Keyword(s): Fiscal Federalism, Jurisdiction Formation, Private Provision Of Public Goods
JEL(s): H2, H7
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2273

This paper examines a model of jurisdiction formation where individuals differ in both income and preferences, and where public provision choices within jurisdictions are the outcome of a political process, but can be supplemented by private contributions. Locational equilibria in this model can feature inefficient segregation along income lines, which is more likely to occur the larger is income heterogeneity. Furthermore, the model predicts that an increase in income heterogeneity can be accompanied by an increase in private provision. This prediction squares with the observed correlation in the U.S. between rising income inequality on the one hand, and recent trends towards fiscal devolution and privatization on the other.