Public Finance, 2nd Edition

MOBILITY AND REDISTRIBUTION

We noted in Chapter 29 that the prevailing model of Wscal federalism calls for

redistribution by the national government, in part because of the so-called

competition problem. Mobility is seen to undermine the redistributional

eVorts of the lower level (``local'') governments. A fairly large literature has

evolved that explores in a positive vein the implications of local redistributions

versus national redistribution when mobility is possible. The overall message

from these studies is that mobility restricts but does not entirely destroy the

possibilities for redistributions by lower level governments. These govern-

ments can likely engage in a considerable amount of redistribution even if

mobility were costless. Furthermore, national redistribution is not necessarily

preferred to local redistributions. We conclude this chapter with a discussion

of three studies that highlight the main issues involved in comparing national

versus local redistribution.

The Brown±Oates Model

Charles Brown and Wallace Oates published one of the Wrst studies compar-

ing local with national redistribution in 1987, a study that is still widely

cited.

16

They adapted the pareto-optimal redistribution model of altruism

to a federalist setting. In their model, each locality i consists of N

i

nonpoor

and P

i

poor individuals. The nonpoor are altruistic to the poorÐtheir utility

depends upon their own income and the income of the poor. But the altruism

of the nonpoor extends only to the poor within their locality; that is, redistri-

bution is a local public good. This assumption generates a motivation for

local redistribution (LR). Transfers are given equally to the poor within each

locality and are Wnanced by equal lump-sum taxes on the nonpoor. Thus,

under LR the cost to each of the nonpoor of a dollar of transfer to each poor

person in locality i is the ratio of the poor to the nonpoor, (P

i

/N

i

).

The poor care only about their own income, and they are the only mobile

citizens in the model. Mobility is costly, consisting of one component, a,

common to all the poor and another component that is speciWc to each poor

person. DeWne C

i

k

as the speciWc migration cost of person k in locality i. Poor

person k will migrate from locality i to locality j if T

j

 T

i

> C

i

k

 a.

To isolate the eVect of mobility on the possibilities for local redistri-

butions, Brown and Oates assume that all nonpoor people have identical

tastes and income and that all poor people also have identical tastes and

income. Under these assumptions, diVerences in the amounts of transfer

16

C. Brown and W. Oates, ``Assistance to the Poor in a Federal System,'' Journal of Public

Economics, April 1987.

30. OPTIMAL FEDERALISM: THE SORTING OF PEOPLE WITHIN THE FISCAL HIERARCHY 881