Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I even say who wrote them. If you have more recent summaries to add to this collection, send them my way I guess. Sorry for the ads; they cover the costs of keeping this online.
Tiebout. 1956. A pure theory of local expenditures. Journal of Political Economy 64 (October): 416-424.
Y: True expression of citizen preferences, thus optimal public goods provision (thus optimal taxation)
X: Citizens select a local government by moving (voting with your feet)
A response to earlier works by [separately] Samuelson and Musgrave. Musgrave and Samuelson studies whether public goods provision could ever be optimal. They determined that it could, but only if citizens expressed their true preferences when voting. Citizens don't do that, however; they understate their preferences for public goods because they don't want taxes to rise.
Tiebout points out the these analyses implicitly assumed that only central governments provide public goods. He turns to local governments. Basically, this is his model:
Local governments produce a package of public goods. Depending on the particular package offered, there is some optimal community size that can provide that package of goods at lowest cost. If citizens are perfectly mobile (they can move on a whim), some people in oversized cities will leave for undersized cities, recognizing that they can get their desired package of public goods at lower cost elsewhere.
In my view, this argument relies on a set of assumptions that are unrealistically strict (see the 7 assumptions listed on page 419). This leads me to several criticisms:
People do select communities to the degree that they can. So you would expect public goods provision to be more optimal than Samuelson and Musgrave predict, even if it isn't perfectly optimal.
Research on similar subjects