Stability of Jurisdiction Structures in Economies with Local Public Goods*

Individuals of different types can form groups, i.e. jurisdictions, for the purposes of collective consumption and production of local public goods by the members of the jurisdictions. Also, the utility of an individual may be affected by the composition and size of the jurisdiction of which he is a member. Jurisdiction formation is endogenous. Trade of private goods can occur within jurisdictions and within collections of jurisdictions. A stable partition of individuals is shown to exist for all sufficiently large economies. This stability depends, partially, upon the extent of ‘satisficing’ behavior or alternatively, jurisdiction formation costs, both of which can be made arbitrarily small. The major noteworthy assumption is that positive outputs cannot become virtually free in per-capita terms as the economy is replicated; this ensures that the public goods are ‘local’ rather than ‘pure’; otherwise assumptions on production sets are minimal and, in particular, convexity is not required. To obtain stability with coalition formation costs, additional assumptions are made ensuring that there is a ‘minimum efficient scale’ for coalitions.