Review of Economic Studies (1999) 66, 659–677 0034-65279900270659$02.00  1999 The Review of Economic Studies Limited A Dynamic Tiebout Theory of Voluntary vs. Involuntary Provision of Public Goods GERHARD GLOMM Michigan State University and ROGER LAGUNOFF Georgetown University First version received February 1996; final version accepted September 1998 (Eds.) This paper considers a dynamic model of Tiebout-like migration between communities that utilize distinct allocation procedures for public goods. At issue is whether voluntary or compulsory procedures are more likely to prevail over time. We model infinitely lived individuals who make repeated, sequential location decisions over one of two communities. Each community uses a distinct mechanism for allocating public goods. The first is one in which contributions are given voluntarily by the citizenry of the community. The second is a compulsory scheme by which individuals are taxed proportionately to wealth with the tax determined by a majority vote. Oppor- tunities to accumulate wealth exist via accumulation of public capital. The Markov Perfect equilibria of the dynamic game are studied. Our main result shows that when accumulated wealth converges to a steady state, individuals’ locational choices eventually ‘‘select’’ the involuntary provision mechanism. This holds despite the fact that unanimous location in the voluntary provision community may in many cases remain as a Nash equilibrium of the static game each period. We also describe conditions under which voluntary provision survives. These conditions require that accumulation of capital fails to decrease wealth dispersion over time. The results are shown to be consistent with findings relating inequality to school choice. 1. INTRODUCTION There are two major problems associated with public goods provision. One is the standard free-rider problem. This problem exists when provision is voluntary rather than coercive. Since individual incentives lead typically to underprovision of the good, individuals may prefer to submit to some degree of centralized coercive provision. A common way to accomplish this is through involuntary taxation which is decided by some voting rule. However, this leads to a second potential problem. Even if free riding is to be overcome, heterogeneous individuals will by no means agree on the appropriate output and contri- butions. Hence, there is a problem of conflicting interests. Individuals in different income groups may have widely varying preferences on the appropriate tax rate. An individual may be compelled to contribute at, what is for him, a highly undesirable tax rate. Given these problems, the tradeoff between voluntary provision and coerciveinvol- untary provision is clear. Involuntary provision may overcome free riding, but creates potential conflicts in choosing tax rates. By contrast, voluntary provision does not compel anyone to contribute, but it cannot prevent free riding. In either case, if an individual does not like the current provision level and contribution, he can ‘‘vote with his feet’’ by 659 ps322$p844 24-06-99 15:33:33