Revealing Preferences via Exit and Voice

Abstract

Chapter 1 noted the problems created if local governments implemented programmes designed to achieve substantial income redistribution from high-income to low-income groups. It concluded that outward migration of high-income groups and inward migration of low-income groups would not only make such programmes ineffective but also create allocative inefficiency. This conclusion was based on the propensity for individuals and households to migrate to local governments providing their preferred mix of taxes and services. Chapter 2 provided the efficiency rationale for decentralized units of government and Chapter 3 demonstrated how allocative efficiency is underpinned by the ability of consumers to exit from suppliers whose outputs are of poor quality. These separate strands of analysis can now be combined to show that unconstrained migration between decentralized units of government has the potential to provide a solution to the long-recognized problems relating to revealed preferences for public goods.