In this paper we develop a framework for studying tax competition and localpublic goods supply in a setting where real and fiscal externalities interact with localdemocracy. We use the framework (a) to analyse if there is any reason to believe that local autonomy generally will give a tax race to the bottom (there is not), and (b) to look more closely at possible sources of oversupply or undersupply of publiclyprovided goods in a setting where local democracies compete for people. We identifytwo potential sources – the relationship between individual mobility and willingness topay for publicly provided goods, and the mobility distribution of individuals (i.e. thedistribution of individuals over residential preferences). The two could reinforce eachother in a local democracy if the majority of the residents in a community are relativelymobile (the “American” case), while they would pull in opposite directions if themajority of residents are relatively immobile (the “European” case).
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