Ž . JOURNAL OF URBAN ECONOMICS 43, 2351 1998 ARTICLE NO. UE962030 Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes* Dennis Epple Graduate School of Industrial Administration, Carnegie Mellon Uni  ersity, Pittsburgh, Pennsyl  ania 15213 and Glenn J. Platt Department of Economics, 208 Laws Hall, Miami Uni  ersity, Oxford, Ohio 45056 Received December 11, 1995; revised October 1996 This paper studies equilibrium and redistribution in a system of local jurisdic- tions when households differ by both preferences and income. Differences in preferences may be either idiosyncratic or associated with differing demographic characteristics. Households are free to move among communities that offer differ- ent tax-expenditure packages. Within communities, households vote on the tax-ex- penditure package the community provides. Heterogeneity of preferences, as well as incomes, gives rise to an allocation of households across communities in which stratification by income no longer holds. In most previous models, complete income stratification is a necessary condition for equilibrium. The partial, but not complete, sorting of households by income that arises in our model is in better accord with observed allocations of households across jurisdictions in U.S. metropolitan areas.  1998 Academic Press I. INTRODUCTION Communities in U.S. metropolitan areas exhibit much more sorting by income than would occur if households were randomly assigned to commu- nities. However this sorting by income is incomplete. The incomes of the wealthiest households in communities with low average income typically exceed those of the poorest households in communities with high average *This research is supported by the National Science Foundation. We acknowledge helpful comments received from presentations of an earlier version of this paper at the University of British Columbia, Carnegie Mellon University, University of Florida, University of Maryland, and New York University. We are particularly indebted to Richard Romano for his insightful comments. We remain responsible for any errors. 23 0094-119098 $25.00 Copyright  1998 by Academic Press All rights of reproduction in any form reserved.