Charles Tiebout, 1956. A Pure Theory of Local Expenditures, Journal of Political Economy; A critical analysis.

“The Tiebout Hypothesis is that individuals reveal their preferences for high or low public services (and related high/low taxes) by "voting with their feet." Competition among jurisdictions results in homogeneous communities, with residents that all value public services similarly, such that, in equilibrium, no individual can be made better off by moving, and the market is efficient.”

The title of Tiebout's most famous article, "A Pure Theory of Local Expenditures," is a reply on Paul Samuelson's famous 1954 article, "The Pure Theory of Public Expenditures." Samuelson and other economists had analyzed the "free rider problem" that governments face when they provide goods and services, which was based on a highly centralized economy and governance. If no one can be excluded from consuming the public goods, individuals do not have a choice to reveal their preferences for them. Everyone has an incentive to understate their true preferences to reduce their own tax burden, while still hoping to be able to enjoy the public good supplied by others. Markets therefore fail to provide public goods efficiently, and some form of government intervention is needed.

Tiebout's key insight was that this problem is different when local governments provide goods to citizens who can move among distinct communities. If citizens are availing with a number of communities that offer different types or levels of public goods and services, then each citizen will choose the community that best satisfies their own particular demands. Citizens with high demands for public goods will concentrate themselves in communities with high levels of public services and high taxes, while those with low demands will choose other communities with low levels of public services and low taxes. Competition among jurisdictions results in homogeneous communities, with residents that all value similar public services .And thus it does not require a political solution to provide the optimal level of public goods. Theory ensures that local governments do not overproduce public goods, thereby wasting valuable local resources. The model also assumes that there is an optimal level of population for each community, depending on some fixed resource, the beach space for example. Beyond this optimum number, an individual would have to look for the next best community that fits his or her preferences. Economic forces would automatically push people out of a city that has exceeded its optimum size and pull people in when the optimum population has not been reached. Hence spatial mobility provides a way to determine the level of public goods.

According to him, local governments can efficiently provide what are essentially private goods like education and garbage collecting. Tiebout noted that at the time about half of all government services fell into the domain of local governments and were then subject to this type of analysis. In contrast to the prevailing assumption that government would often provide inefficient levels of public goods, Tiebout showed that these decentralized systems act just as regular markets.

Even though the idea that people will always prefer to move from one community to other without reconsidering or claiming tax reduction to local governance could be accepted completely. People do lobby local bodies, on providing quality services for lessening the tax rates. These push pull factor and resulting optimal condition of goods and services can only result when people are not having a substantial participation in local government’s decisions.

Tiebout's paper was a purely theoretical piece, but it has had wide empirical application. A large literature in local public finance has built on his insights about community choice to estimate demands for local public goods like education, sanitation, and to study how property values reflect area taxes and services (beach example). Tiebout's insights have had a large impact on debates about fiscal federalism and the proper roles of central, regional, and local governments.