The Tiebout Hypothesis, Undercapitalized Fiscal Surplus, Housing Prices, and Geographic Mobility

By Cebula, Richard J. | Journal of Global Business Issues, Summer 2007 | Go to article overview

The Tiebout Hypothesis, Undercapitalized Fiscal Surplus, Housing Prices, and Geographic Mobility


Cebula, Richard J., Journal of Global Business Issues


Abstract

Within the context of the Tiebout hypothesis, the present study investigates whether undercapitalized fiscal surplus, which would be reflected in lower housing prices (after adjusting for differences in the overall cost of living by state), influences interstate migration. If so, migrants would naturally be attracted to lower housing price states, ceteris paribus. After allowing for factors such as the growth rate of GSP, the presence of hazardous waste sites, climate, and other factors, it is found consistently that the net state inflow of migrants over the 2000-2004 period was negatively and significantly affected by higher real median prices on single-family homes.

INTRODUCTION

According to Tiebout (1956, p. 418), "...the consumer-voter may be viewed as picking that community which best satisfies his preferences for public goods. ..the consumervoter moves to that community whose local government best satisfies his set of preferences." It is accepted that communities with perceived higher levels of "fiscal surplus" will also be communities with higher housing prices, ceteris paribus, since this fiscal surplus is expected to be capitalized into those housing prices. To the extent, if any, that the fiscal surplus is not thusly capitalized, housing prices will be lower than they should be, and there is an inducement for consumer-voters to migrate to the communities with those "under-priced" houses. Given this backdrop, the objective of this study is to empirically investigate the following hypothesis: the lower the real median price of single-family homes in an area, the higher the net inmigration rate into that area, ceteris paribus. By focusing on the real as opposed to nominal median price of single-family homes, this study controls for overall differentials in the cost of living and focuses on the potential impact of undercapitalized fiscal surplus.

Numerous previous studies have empirically addressed determinants of internal migration in the U.S. A number of these studies emphasize the migration impact not only of economic factors but also of non-economic, i.e., so-called "quality-of-life" factors (Cebula & Belton, 1994; Clark & Hunter, 1992; Conway & Houtenville, 1998; 2001; Davies, Greenwood, & Li, 2001; Gale & Heath, 2000; Gallaway & Cebula, 1973; Milligan, 2000; Renas, 1978; 1980; 1983; Saltz, 1998; Vedder, 1976; Vedder & Cooper, 1974). As demonstrated in Clark & Hunter (1992), Gallaway & Cebula (1973), Renas (1978, 1983), and Riew (1973), among others, omission of non-economic factors from an empirical migration analysis constitutes an omitted-variable problem that generally compromises the integrity of that analysis. As a consequence, this empirical study will include not only the real median price of single-family homes and other economic variables but also non-economic factors.

The present empirical study deals with net state in-migration rate determinants for the period 2000-2004, a period that to date understandably has not as yet received an extensive degree of attention in the empirical migration literature. Thus, the study deals with very current/recent information on U.S. internal migration and its determinants.

A MODEL OF IN-MIGRATION

This study parallels the migration-investment models developed in Sjaastad (1962), Gâtons & Cebula (1972), Riew (1973), and Cebula (1979, Ch. 4). Specifically, the consumervoter is treated as regarding the migration decision as an investment decision such that the decision to migrate from area i to areaj requires that his/her expected net discounted present value of migration from area i to area j, DPVij, be (a) positive and (b) the maximum net discounted present value that can be expected from moving from area i to any other known and plausible alternative area.

Following in principle the models in Sjaastad (1962), Gâtons & Cebula (1972), Riew (1973), and Cebula (1979, Ch. …

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