Equilibrium and local redistribution in an urban economy when households differ in both preferences and incomes

This paper studies equilibrium and redistribution in a system of local jurisdictions when households differ by both preferences and income. Differences in preferences may be either idiosyncratic or associated with differing demographic characteristics. Households are free to move among communities that offer different tax-expenditure packages. Within communities, households vote on the tax-expenditure package the community provides. Heterogeneity of preferences, as well as incomes, gives rise to an allocation of households across communities in which stratification by income no longer holds. In most previous models, complete income stratification is a necessary condition for equilibrium. The partial, but not complete, sorting of households by income that arises in our model is in better accord with observed allocations of households across jurisdictions in U.S. metropolitan areas. (C) 1998 Academic Press.