Essays on local public goods and private schools

World is becoming more and more fiscally decentralized over time. Share of central government spending in total government spending declined from 75% to 65% between 1975 to 1995 in the world. Motivated by this, this thesis is concerned about two problems related to our current understanding of fiscally decentralized economies. In the first chapter, an explanation is given for the observed household income sorting pattern across municipalities where each municipality provides its own local public good. In the second chapter, an equilibrium existence result is provided for an economy where both local public schools and private schools coexist.

In the first chapter, I quantitatively explain the empirical household income distribution across municipalities. In the data, poor and rich households live together with varying fractions in all municipalities although there are large public expenditure differentials. To explain data, I construct a multi-community general equilibrium model at which heterogeneous income households probabilistically choose among communities where municipalities are comprised of several communities. The indivisibility in the choice set of households gives them the incentive to assign non-degenerate probabilities to each community which in turn gives rise to an income distribution resembling to that in data. The calibrated model is then used to analyze two public policies, uniform property tax rate and uniform housing supply across municipalities, with respect to their effects on income sorting.

The second chapter provides a median voter theorem for an economy where public and private schools coexist. Since households can opt out of public education, preferences over income tax rates are not single peaked leading possibly to nonexistence of majority voting equilibrium and decisive voter. Because of this, policy analysis of such economies proved difficult. To solve this nonexistence problem, I assume, consistently with empirical evidence, that private schools behave as monopolistically competitive firms with decreasing average costs over enrollment. In my model, there are a finite number of different quality private schools each having a different tuition. Public school spending is financed by income tax revenue collected from all households. The tax rate is determined by majority voting. I argue that preferences over tax rates are single peaked and therefore a majority voting equilibrium exists. Moreover median income household is the decisive voter. These results hold for any income distribution function and any finite number of private schools.