In this article, J. Donahue examines the Tiebout model of interjurisdictional competition at the state level. He agrees that competition of service provision and taxation at the local level can wring out waste and tighten management by forcing officials to respond to citizens priorities and deliver more value for taxpayers money.

Donahue also argues that the market has real life conditions for competition that are not given at the government level. For example, new governments do not have free and easy entry. He questions solutions for government competition by saying that there are cases when decentralization can yield higher disadvantages than advantages to the well being of the local government. To support his view, he presented three cases in which interstate competition benefits are questionable:

The Case for Collusion. This involves states working together instead of competing with one another to reach better outcomes. Interstate competitive bidding attracts jobs (investment incentives) but turns hazardous to the locality if it starts offering more than the new job is going to provide. For example, in the case of the states allowing gambling casinos, certain sates that have not legalized casino gambling may suffer from its side effects such as crime and psychological illnesses, in addition to the money outflow of the residents who gamble elsewhere. In these cases governments would be better off if they collaborated and set common standards.

Heterogeneous Mobility and Citizens Surplus. Changes in state policy have made citizens feel that they are expected to vote with their feet. Donahue says that only a low 3% of the US population moved to different states in 1990 (1990 US census results). He explains this with the citizens surplus concept that says that most citizens have other ties (extra value) to their locality (i.e., family, friends and economic connections) in addition to the services they receive or taxes they pay. Furthermore, although businesses do not have locational ties, they have other kinds such as strong investments or location access to inputs or markets. There are an increasing number of businesses that base their location decisions on state policies being made. Interstate competition can be expected to evolve to favor and attract businesses that are more mobile and desirable.

Distribution, Income Inequality and Welfare Reform. Notorious gains have resulted from the transfer of distribution responsibilities to state governments (wage increases, targeting areas with distributional issues. However, Donahue says that the effects of the Personal Responsibility and Work Opportunities Reconciliation Act of 1996 will remain a matter of conjecture until the results can be observed. Donahue also suggests the possibility of a race-to-the-bottom triggered by the future cut of federal welfare transfers to the states that would increase their welfare benefit cuts so that they do not become welfare magnets, or attract the poor in search of better benefits.