Abstract :
This paper provides an explanation for the common observation that higher income neighborhoods typically receive better public services compared with lower income neighborhoods. Intuitively, one might expect that lower income groups, which usually form the voting majority of cities, would object to an unfair allocation of this nature. Wealthy individuals, however, have the option of moving to the suburbs. As we learn from the tax competition literature, mobile factors are generally able to command a premium. Since institutional constraints prevent regressive taxation and public goods are by definition consumed in equal quantity by all agents, only public services remain as an instrument for municipalities to use to keep wealthy agents in their tax base. We show that both rich and poor agents benefit from this differential access to public services and explore how factors like the ratio of rich to poor and the differences between their incomes affect the equilibrium allocation.
