This paper argues that long-run trends in geographic segregation are inconsistent with models where residential choice depends solely on local public goods (the Tiebout hypothesis). We develop an extension of the Tiebout model that predicts as mobility costs fall, the heterogeneity across communities of individual public good preferences and of public good provision must (weakly) increase. Given the secular decline in mobility costs, these predictions can be evaluated using historical data. We find decreasing heterogeneity in policies and proxies for preferences across (i) a sample of U.S. municipalities (1870–1990); (ii) all Boston-area municipalities (1870–1990); and (iii) all U.S. counties (1850–1990).

The economic theory of federalism is largely built around the premise that more heterogeneous preferences result in more decentralized policy making. Despite its prominence and importance, this central tenet of economic federalism has never been empirically evaluated. This paper presents the first formal test of the link between preference heterogeneity and endogenous policy decentralization using as a case study liquor control in the United States over the period 1934–70. The results are reassuring: States with more heterogeneous preferences are more likely to decentralize liquor control and allow for local government decision making.