State fiscal institutions and empty-nest migration: Are Tiebout voters hobbled? Martin Farnham a, * , Purvi Sevak b a Department of Economics, University of Victoria, PO Box 1700 STN CSC, Victoria BC, Canada V8W 2Y2 b Department of Economics, Hunter College, 695 Park Avenue, New York, NY 10021, USA Received 1 August 2004; received in revised form 25 May 2005; accepted 13 July 2005 Available online 20 October 2005 Abstract Using the Health and Retirement Study and a national panel of local fiscal data, we test a lifecycle model of Tiebout sorting. On average, cross-state, empty-nest movers—presumed to be out of fiscal equilibrium—experience large fiscal gains in the form of reduced exposure to local school spending and property taxes, while local empty-nest movers experience no fiscal adjustment. We find evidence that within-state fiscal adjustment is constrained by state institutions that limit local discretion. Empty-nest households moving within states with school finance equalization do not engage in Tiebout-consistent fiscal adjustment, while those moving within states lacking school finance equalization adjust substantially. D 2005 Elsevier B.V. All rights reserved. Keywords: Tiebout hypothesis; Taxation; Migration; State and local government 1. Introduction The Tiebout hypothesis (Tiebout, 1956) posits that residential sorting can lead to efficient provision of local public goods. Tiebout argues that if mobility is costless, individuals will bvote with their feetQ by moving to the community that provides the best available combination of taxes and services. Under strong assumptions about production technology, the absence of spillovers to neighboring communities, and sufficient choice of communities, the resulting equilibrium is efficient. If the Tiebout hypothesis holds, the policy implication (ignoring equity) is simple: a decentralized mechanism of local public goods allocation, in which tax and service levels are set locally, is preferable to provision imposed by a central authority such as a state or federal government. 0047-2727/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jpubeco.2005.07.005 * Corresponding author. E-mail address: mfarnham@uvic.ca (M. Farnham). Journal of Public Economics 90 (2006) 407 – 427 www.elsevier.com/locate/econbase