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November 30, 2022 

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VERTICAL MERGER: The consolidation under a single ownership of two separately-owned businesses that have an input-output relationship, in which the output of one firm is the input of another. An example of a vertical merger would be a soft drink company merging with a sugar company to form a single firm. A vertical merger should be contrasted with horizontal merger--two competing firms in the same industry that sell the same products; and conglomerate merger--two firms in totally, completely separate industries.

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TIEBOUT HYPOTHESIS:

The notion that people relocate from one political jurisdiction to another in search of a more preferred package of government taxes and spending. Named after economist Charles Tiebout, this hypothesis suggests that people "shop" for compatible government activity in the same way they might shop for a car, a house, or a flavor of ice cream. However, shopping for a preferred government package is influenced by other factors affecting migration.
The Tiebout hypothesis indicates that people (voters) have two options for influencing the role of local government intervention in the economy. They can vote to change the package of government taxes and spending undertaken by their local government (city, county, or state) or they can relocate to another community that offers a more preferred package. The second option is the Tiebout hypothesis at work.

Both alternatives improve the allocation of resources by more closely matching the package of government activity with voter/consumer preferences. The problem, however, is that voters/consumers do not have equal abilities to relocate to a community that best matches their preferences. Other factors, including job and community ties, also affect relocation.

For example, Roland Nottingham, a long-time disgruntled citizen of Shady Valley is not particularly pleased with anything the Shady Valley city government is doing. He doesn't like the taxes imposed. He doesn't like the expenditures made.

Roland is pondering a move to nearby Oak Town, which apparently has a package of city government taxes and spending that is more to Roland's liking. Should Roland make the move to Oak Town, then he has provided a bit a support to what is termed the Tiebout hypothesis.

Voting Options

The Tiebout hypothesis indicates that people have two methods of "voting" on government activity.
  • At the Ballot Box: The standard method, of course, is to cast a vote in elections. People cast a vote for the more preferred candidate or election issue. Candidate A proposes higher taxes to be used for public education. Candidate B proposes a tax cut to encourage business activity. A citizen like Roland can then cast a vote for the most compatible candidate. If a majority of others do the same, then Roland is happy.

  • With the Feet: The Tiebout method is to "vote with the feet," to "cast" a vote for the political jurisdiction with the most preferred package of government activity. City A has higher taxes that are used for public education. City B has lower taxes that encourages business activity. A citizen like Roland can then cast a "vote" for the most compatible city by moving to that city.

The Local Package

The key to the Tiebout "voting" option is that different political jurisdictions have different tax and spending packages. Some tax a lot and spend a lot. Others tax a little and spend a little. Even if the total amount of taxing and spending is the same, they have differences in the mix. Some rely more on income taxes, others on sales or property taxes. Some spend more on education, others on transportation or police protection.

These differences then tend to be self-reinforcing. As people vote with their feet, they relocate to areas that are more compatible. Doing so strengthens and reinforces the voting majority who have a preference for the local package.

One of Many

While the desire to find a suitable political jurisdiction is certainly a powerful force, it is only one of many that affect the decision to relocate. Roland Nottingham, for example, can easily move to Oak Town in search of better city government because he has very few reasons to remain in Shady Valley. He is retired, meaning he has no job to keep him in Shady Valley. He is single and childless, meaning he has no family to keep him in Shady Valley. He rents an apartment, meaning he has no house or property to keep him in Shady Valley.

In contrast, a person like Jonathan McJohnson cannot move to another city quite as easily. He has a job with OmniConglomerate, Inc. that keeps him in Shady Valley. He has a wife and children, all of whom enjoy living in Shady Valley and don't care to leave. He owns a nice house in the suburbs, which he had custom built and doesn't want to sell.

Even though Jonathan might prefer the government package provided by Oak Town as much as Roland, he is less likely to "vote with his feet" and make the move to Oak Town. He has too much keeping him in Shady Valley. He must rely on traditional ballot-box voting to achieve a suitable government package of taxes and spending.

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Recommended Citation:

TIEBOUT HYPOTHESIS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: November 30, 2022].


Check Out These Related Terms...

     | voting problems | logrolling | median voter principle | voting paradox | government failures | rational ignorance | rational abstention | voting rules | special interest groups |


Or For A Little Background...

     | public choice | public choice politics | political game | political views | conservative | liberal | market failures | government functions | public finance | efficiency | public sector |


And For Further Study...

     | political entrepreneurs | capture theory of regulation | rent seeking | principal-agent problem | government bureaucracies |


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