Tiebout dynamics: a small-area study of the response to a central-city / suburban house-price differential

Abstract

Abstract Differences in the market value of local public services and taxes capitalize into house prices, creating price differentials across service-district boundaries. Henderson (1985) expects these differentials to generate one or more of several supply responses that over time reduce the price differential. We take advantage of an unusual natural experiment – a 1920s subdivision of relatively high-quality housing split neatly in half by a central-city/suburban boundary – to study the response to the relative decline since the 1960s in the quality of central-city services. House sales since 1949 reveal the expected divergence in house prices in the late 1960s, but, contrary to Henderson’s prediction, the boundary price differential persists through the end of the century. Census data and survey results indicate that there has been a “supply response”: the high quality houses on the central-city side of the subdivision attract households demographically similar to their suburban counterparts who supplement central-city services through a neighborhood association and send their children mostly to private schools. The house-price differential persists to compensate for the costs of the privately-supplied services.