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Life Cycle Dynamics within Metropolitan Communities

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journal contribution
posted on 29.05.2007, 00:00 authored by Dennis EppleDennis Epple, Richard Romano, Holger Sieg
In this paper we study the life cycle locational choices of heterogeneous households and characterize the dynamics of metropolitan areas. We develop an overlapping generations model for households in of a system of multiple jurisdictions. At each point of time households choose among the finite number of jurisdictions, pick consumption and housing plans, and vote over education expenditures and tax policies. A household’s composition changes over the life cycle as children grow up and leave the household. These changes in turn impact the household’s need for housing and for local public services, particularly education. Households face frictions in relocating. A household may relocate as needs change, bearing the associated financial and psychic costs of moving. Alternatively, the household may choose to remain in a community that suited its initial needs, finding the costs of relocation to be greater than the potential benefits of moving to a community better suited to its changed housing and public education. Our quantitative analysis shows that mobility costs are likely to have a large impact on household sorting patterns. Mobility costs also impact the political decisions that determine local tax and expenditure policies. Finally, we compare centralized and decentralized mechanisms for providing education and their impact on human capital accumulation and welfare.

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29/05/2007

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