this paper is to introduce a model with public goods and differentiated crowding in which decentralization of the core does not require prices that are dependent on preferences of agents. The key difference between the model presented here and previous differentiated crowding models is that we make a distinction between two separate sets of characteristics of agents. The first set consists of tastes and endowments. These are unobservable and do not enter into the objectives or constraints of other agents. The second set includes crowding characteristics that enter into utility or production functions and therefore affect the welfare of others. We assume that crowding characteristics are observable and allow their effects to be either positive or negative. For example, we may be able to distinguish males from females, but we cannot usually tell which agents prefer country music to jazz

on the presentation to the Econometric Society European Meeting, Munich.] In economies with adverse selection, Arrow-Debreu contingent commodity contracts must satisfy incentive constraints. Following Prescott and Townsend (in Econometrica, 1984), an Arrow-Debreu economy is considered with a continuum of agents whose feasible sets are artificially restricted by imposing these incentive constraints. Equilibria in such an economy must be incentive-constrained Pareto efficient. It is shown that deterministic equilibria of this kind are achievable through “perfected ” option markets with non-linear pricing in a way which makes the incentive constraints self-enforcing. Rothschild, Stiglitz and others have shown, however, that these equilibria must be vulnerable to free entry by profit seeking firms. 1. Introduction. PERFECTED MARKETS It is becoming generally well understood how adverse selection and moral hazard cre-ate incentive constraints which restrict what is truly feasible in economies with private

This paper studies the stability of a finite local public goods economy in horizontal di#erentiation, where a jurisdiction's choice of the public good is given by an exogenous decision scheme. In this paper, we characterize the class of decision schemes that ensure the existence of an equilibrium with free mobility (that we call Tiebout equilibrium) for monotone distribution of players. This class contains all the decision schemes that lie between the Rawlsian decision scheme and the median voter with mid-distance of the two median voters when there are ties. In the last part of the paper, we prove the non-emptiness of the core of this coalition formation game.

Tiebout's basic claim was that when public goods are local, competition between jurisdictions solves the free riding problem in the sense that equilibria exist and are alway s Pareto e#cient.Unfortunately , the literature does not quite support this conjecture. For finite economies, one must choose between notions of Tiebout equilibrium which are Pareto optimal but which may be empty , or which are nonempty but may be inefficient. This paper introduces a new equilibrium notion called migrationp oof Tiebout equilibrium which we argue is a natural refinement of Nash equilibrium for a multijurisdictional environment. We show for su#ciently large economies with homogeneous consumers, such an equilibrium alway s exists, is unique, and isasy#qN0Ififi6fi6 Pareto e#cient. 1.

Economic models of decentralization generally emphasize beneficial consequences—efficient provision of local public goods, hard budget constraints, and sorting of residents according to taste. This paper notes two less benign effects. First, political decentralization makes it easier for subnational governments to collude with enterprises at the center’s expense, offering firms political protection against central tax collectors and bankruptcy agents (“regional fiscal protection”). Second, because multiregional enterprises have a larger set of potential regional protectors, political decentralization advantages them over smaller, single-region firms (the “multiregional advantage”). Fiscal decentralization alleviates some problems, but exacerbates others such as the shift of output underground. A simple model shows how these and other phenomena follow from the assumption of revenue-maximizing governments in a state with inter-level revenue-sharing and imperfect law enforcement. Various predictions of the model are compared to recent economic experience in Russia and are found to fit remarkably well. Many problems—including official stagnation, booming underground economy, growing interregional fiscal inequality, economic dominance of the “oligarchs”, falling federal tax revenues, and frequent economic conflict between central and regional governments—that are often explained by ad hoc and personal factors (Yeltsin’s health, high-level corruption, misguided economic reform strategies) can all be traced at least in part to the logic of competition in a decentralizing, revenue-sharing state.

Abstract. We examine theoretically and quantitatively the welfare effects of decentralized (Tiebout) provision of local public goods as compared to uniform centralized provision. Our theoretical contribution is a characterization, new to the literature, of the first-best allocation, including a demonstration that, under empirically relevant conditions, decentralization is efficient and is achieved by head taxes without the need for restrictions either on mobility or on housing markets. Our quantitative contribution is a comparison of the efficient allocation (decentralized equilibrium with head taxation), the decentralized equilibrium with property taxation, and the centralized equilibrium with property taxation. We show that inefficiencies associated with decentralized provision with property taxation are large, dissipating most if not all of the potential welfare gains from matching provision to preferences under decentralized provision. We identify an externality in community choice as the major source of inefficiency: Poorer households crowd the suburbs while avoiding taxes by consuming little housing. Our quantitative findings are based on a calibrated computational model and an estimated model.

* The second author thanks the German–Israeli Foundation and the European Commission for financial support through the GIF and TMR grants. This paper presents a model of group formation based on the assumption that individuals prefer to associate with people similar to them. It is shown that, in general, if the number of groups that can be formed is bounded, then a stable partition of the society into groups may not exist. (A partition is defined as stable if none of the individuals would prefer be in a different group than the one he is in.) However, if individuals ’ characteristics are one-dimensional, then a stable partition always exists. We give sufficient conditions for stable partitions to be segregating (in the sense that, for example, low-characteristic individuals are in one group and high-characteristic ones are in another) and Pareto efficient. In addition, we propose a dynamic model of individual myopic behavior describing the evolution of group formation to an eventual stable, segregating, and Pareto efficient partition. Journal of Economic Literature Classification Numbers: C72, H41. Key Words: group formation; coalition structure; local public goods;

: Wo#hw unrestricted"eco#trict migratio# enhance the po#wW tial gainsfro# free trade? With freemigratio#2 co#ratio#2 feasible sets beco#? no##?Gh vex. Under standard assumptio#"? ho wever, Walrasian equilibrium existsfo# aco# tinuumo# individuals with dispersed ability to a#o#k eacho f a finite seto# po#"hh"G migratio# plans. Then familiarco#liar2fifi ensuring po#wh tial Pareto gainsfro# tradealso ensure that freemigratio# generates similar supplementary gains, relative to an arbitrary statusquo# As with the gainsfro# custo#fi unio##fi ho wever, wealth may haveto be redistributedacro#s internatio#h" bo#wfiWkfi JELClassifi ation: F22, F13, D61, C62. Keywords:Migratio#h gainsfro# trade, general equilibrium,no#uili vexities. 1 Trade andMigratio# 1. Introduction 1.1.T rade versus Migration.Amo#r po#hGwh2LGw"fi eco#o#2LGw" surelyo#r o# the mo#2 widely accepted claims must be that internatio#Gh free trade generally has desirableco#rable2h""? Pro# o#o#2o#l co#2o#le2h the gainsfro# tra...

Introduction The quotes that open this Chapter are clear statements of principle by pioneers working on similar issues in different times and locations. The mix of social policies in Europe today, however, fails on both criteria: they are uncoordinated, often conflicting, and far from simple to understand or implement. 2 Despite obvious interactions between economic integration and social-welfare provision, little is done at the central European Union level to bring social policies together and address countryspecific crises and integration challenges. The failure to provide guidance on the challenges facing social provision at the country level, in light of the removal of economic borders across the Union, exposes European policies to the twin risk of inertia on the one hand, and uncoordinated and unsustainable reforms on the other. In what follows, we document the current situation and analyze the reform pressures in the new united Europe. We argue that cur

Most existing models of fiscal competition between states within federations or regional unions share at least two common features. First, they focus on inter-jurisdictional competition in but one policy instrument, for example, taxes, public goods or environmental quality. The second is that the models capture policy competition as a game and analyze the nature of the Nash equilibrium without considering existence. We recognize that jurisdictions wish to choose efficient policy packages (Non-malevolence Theorem) and this allows us to examine the existence of equilibrium when there are multiple policy instruments. Sufficient conditions for existence are established followed by three examples. In the first, the sufficient conditions are satisfied, guaranteeing existence. For the second example, the sufficient conditions are not met but an equilibrium exists, while in the third example there is no equilibrium. The analysis shows that existence is by no means assured in fiscal competition models and much depends on the particular specification of the model employed.