Date of Award

2020

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Yu, Sherry

Area of Concentration

Economics

Abstract

The Tiebout Model (1956) became one of the most influential models to explain how even government services, on the local level, are not isolated from the market process. In the years after Tiebout’s publication, several criticisms of the model were made, and additional assumptions proposed to preserve whatever practical application the model could still have. Among the criticisms advanced, one will set the tone for the additions made here: most neighborhoods do not collect head taxes (an important assumption in Tiebout’s model), but property taxes. Property taxes lead to inefficient housing consumption because people are inclined to pay less tax dollars for their government service consumption. When taxes are collected as a percentage of a house’s value, there is an incentive to buy cheaper homes. It was later proposed that zoning could fix the problem, but an important paper by Barseghyan & Coate (2016) provided an important critique of that assertion. In a dynamic model, it is possible to incorporate zoning’s grandfathering clause, meaning the fact that zoning changes only apply to future construction, not past construction. Once the grandfathering clause is incorporated, Barseghyan & Coate show inefficiencies arise in equilibrium. This paper utilizes Barseghyan & Coate’s formulation to explore an important addition to their model: agglomeration economies’ effect on wages. One captivating question that Tiebout’s model spurred was whether neighborhood fiscal variables will be capitalized into house prices. The research on agglomeration economies has shown that industry concentration patterns, city size, and density levels affect local wages, and therefore an income premium influenced by neighborhood dynamics is a fiscal variable. Using some of Barseghyan & Coate’s model assumptions, this paper explores the nature of income’s capitalization into house prices, asking whether, using the parlance of Banzhaf & Mangum (2019), income’s capitalization will lead to ”ticket prices” or ”slope prices” (slope prices being synonymous with capitalization into land). This paper concludes by showing income can not be capitalized into land generally, but only under three specific steady states.

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