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Who Benefits from Jurisdictional Competition?

When local governments compete, do their constituents win? Much empirical and theoretical work, inspired by the canonical Tiebout (1956) model, suggests that they do, with jurisdictional competition creating a quasi-market for public goods. In this paper, I consider a case in which special interests, rather than local taxpayers, emerge as the primary winners from jurisdictional competition. My theory predicts that competition among local governments will drive up the wages of highly specialized public-sector employees, a hypothesis for which I find support using a unique survey of employee compensation. I conclude by drawing more general conclusions from the theory, identifying the conditions under which constituents end up as the beneficiaries of jurisdictional competition, and the conditions under which they become its losers.