Tiebout Hypothesis:

Given the efficient outcome under decentralization, the obvious question arises: How do the people react to this decentralization of provisioning of public good? How do they choose a local authority? The resolution of this question, in its turn, determines optimum pattern of provisioning itself.

Tiebout argued that individuals select the local community whose provision of local public goods and tax prices best satisfies their preferences. He argued that in a local community context individuals would reveal their preferences, by moving to the locality that best reflected their tastes and offered the preferred tax - benefit mix.

He, however, assumed that this mobility of people is relatively costless. Thus the individuals reveal their preferences by 'voting with their feet'.