ABSTRACT
To illuminate these issues, we shall examine three models in which property values reveal information about household pre ferences for local public goods and/or expenditure efficiency. Then we discuss the special features of these models that allow such results to emerge. Finally, we examine the question of capitalization and underfunding of municipal pensions. This is a particularly interesting aspect of the capitalization issue because it involves changes in the intertemporal structure of local taxation. Before starting, however, it is useful to note a possible ambiguity in the concept of capitalization. This term could refer to the change in equilibrium land or property values in a locality that results from some change in local policy. We shall refer to this as comparative static capitalization. Alternatively, capitalization could refer to the variation in property across jurisdictions that is observed in a given equilibrium. We call this cross-sectional capitalization. Both types of capitalization are widely discussed in the literature, though they are often not clearly distinguished.
