As millions of people world-wide now live in residential areas with restricted access to the public, the ascent of gated communities can no longer be attributed to incidental or deviant development. Hence this paper makes an attempt to discover the economic rationale behind the gated community phenomenon; it discusses the mainstream theses and outlines 10 theorems for an alternative proposition based on theories of public choice and fiscal federalism. The core theorem asserts that a centrally featured system of government diminishes the ability of local municipalities properly to reflect citizens’ demands for local public goods and services, and that this constitutes a strong incentive for people to move into gated communities. In particular, gated and guarded residential developments represent an exit option when local municipalities fail to deploy vital governmental rules and instruments, such as fiscal equivalence and benefit taxation.
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