Equilibria with local governments and commuting: income sorting vs income mixing

Tiebout's model [Journal of Political Economy 94 (1956) 416-424] of fiscal competition suggests income sorting between jurisdictions while the Alonso [Location and Land Use: Toward a General Theory of Land Rent, 1964], Mills [Papers and Proceedings of the American Economic Association 57 (1967) 197-210], and Muth [Cities and Housing, 1969] model of the monocentric city suggests income sorting over space. However, strict income sorting is not empirically observed. We add fiscal competition to the spatial model by considering a circular inner city surrounded by a suburb. The fiscal difference between the jurisdictions and the commuting advantage of locations closer to the city center are capitalized into house prices. In addition to the traditional equilibrium with income sorting, there are equilibria with income mixing-both across jurisdictions and across space. (C) 2003 Elsevier Inc. All rights reserved.