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Objective. This paper analyzes the extent to which voter behavior in city formation elections supports Tiebout's (1956) hypothesis that residential sorting facilitates efficiency of local service provision. It develops a two-stage model of city formation to distinguish agenda setting from voter outcomes on city formation proposals. Methods. Logit analysis is used to analyze voting in 71 city formation elections, incorporating Heckman's two-stage procedure to correct for self-selection of local referenda. Results. Community fiscal and demographic factors influence agenda setting more than voting behavior. Wealthier communities in high-growth counties are more likely to propose formation of a city. In contrast, community characteristics have little influence on electoral outcomes, suggesting that boundedly rational voters rely on information heuristics. Conclusions. Although reduction of diversity did not appear to motivate city formation, sorting around residential income, land use preferences, and other demographic variables may facilitate relative efficiency of service provision. [ABSTRACT FROM AUTHOR]