Local Institutions and the Dynamics of Community Sorting

Abstract

This paper studies the dynamics by which populations with heterogeneous preferences for local public good provision sort themselves into communities. I conduct laboratory experiments to consider which institutions may best facilitate efficient self-organization when residents are able to move freely between locations. I find that institutions requiring all residents of a community to pay equal taxes enable subjects to sort into stable, homogeneous communities. However, populations can find themselves stuck at local, inefficient equilibria. Though sorted, residents may fail to attain the level of public good provision best suited for them and the system dynamics are crucial for determining whether subjects reach optimally-designed communities. When residents are able to vote for local tax policies with their ballots as well as with their feet, the inefficient local equilibria are eliminated, and each community converges to the most efficient outcome for its population.

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