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Over the past years models characterizing equilibrium in a system of local communities have been elaborated and empirical tests have been performed in order to prove their predictions. These models usually assume mobile households with exogenous income and focus their analysis on the locational choice effect of a unique public good. On the other hand, there are spatial equilibrium models that analyze the impact on productivity and costs reductions of the investment in public infrastructure. In these models infrastructure is not an outcome of an endogenous political economy process. The aim of this paper is to shorten the gap between these literatures by providing a rationale

of how composition of local public expenditures on two goods are determined under endogenous labor income, population mobility and equilibrium of housing markets.

I analyze possible equilibria in a multidimensional policy setup using a two-stage model with two publicly provided goods: (i) a first stage where local governments impose a lump sum tax and spend on a productive public good assumed to influence productivity of inputs — i.e. infrastructure—; and (ii) a second stage in which a tax on housing is allocated to a purely redistributive grant. The equilibrium level of expenditures under a majority voting setup are specified by four cases: (i) no population mobility and

inflexibility of net-of-tax housing prices (perfectly elastic supply of housing), (ii) no population mobility and flexible net-of-tax housing prices (perfectly ineslastic supply of housing), (iii) population mobility and inflexible net-of-tax price of housing (perfectly elastic supply of housing), and (iv) population mobility and flexible net-of-tax prices of housing (perfectly inelastic supply of housing).

For more information, contact Antonio Merlo.