The effect of a local allowance on the endogenous formation of jurisdictions

This paper analyses the effect of allowances, whose amount depends on jurisdictions, on the segregative properties of endogenous formation of jurisdictions. Households choosing to live at the same place form a jurisdiction whose aim is to produce a local public good and to implement a redistribution policy, by granting every household an allowance whose amount is determined by the jurisdiction. In every jurisdiction, the production of the local public services and the allowance are financed with a local tax based upon the households’ wealth. Local wealth tax rates and the level of the allowance are exogenously determined in every jurisdiction. Households are free to leave their jurisdiction for another jurisdiction that would provide them with their highest utility. We find that the existence of an allowance mitigates the segregative properties of endogenous jurisdiction formation, as the condition identified by Gravel and Thoron to ensure the segregation of any stable jurisdiction structure remains necessary, but is no longer sufficient.