Academic journal article Journal of Economics and Economic Education Research

State Rules and Population Heterogeneity on the Formation of New Jurisdictions in Major U.S. Metropolitan Areas

Academic journal article Journal of Economics and Economic Education Research

State Rules and Population Heterogeneity on the Formation of New Jurisdictions in Major U.S. Metropolitan Areas

Article excerpt

ABSTRACT

There are relatively few empirical studies examining the determinants of local government structure and how voters sort themselves into various local governments. These studies have concluded that greater fiscal decentralization occurs when demands for government services of residents within a metropolitan area are more heterogeneous. These findings support the fiscal decentralization hypothesis. However, in a more recent panel study utilizing fixed effects model, I find no evidence of Tiebout-sorting process. There is some evidence of greater decentralization of local government structure, similar to the past studies, if the fixed-effects are not controlled. I find that the state rules have significant impact on the formation of new jurisdictions.

INTRODUCTION

Since the early work of Borcherding & Deacon (1972) and Bergstrom & Goodman (1973), empirical studies of the determinants of demand for government spending typically find that demand is a function of socio-economic variables such as income, age, and race. Another strand of the local public finance literature examines the determinants of local government structure and attempts to explain how voters sort themselves into various local governments according to these population characteristics. This paper is motivated by a relatively small number of recent empirical studies that attempt to explain variation in local government structure across metropolitan areas by examining the relationship between population characteristics and the number and size of local governments within a metropolitan area. Specifically, studies by Nelson (1990), Kenny and Schmidt (1994), Martinez Vazquez et al. (1997), Wassmer and Fisher (1997), and Fisher and Wassmer (1998) have investigated the relationship between measures of population heterogeneity and the number and size of local governments in U.S. metropolitan areas.

A common theoretical framework underlying these studies is the "fiscal decentralization" hypothesis. As suggested by the work of Tiebout (1956) and as explained by Oates (1972, p. 35), a system of decentralized local governments can achieve allocative efficiency in the provision of local public goods by allowing consumers with different preferences for government spending to reside in different communities. Instead of having many heterogeneous consumers who are dissatisfied with the quantity of government services offered by a single centralized government, decentralized provision can increase consumer welfare by improving the match between consumers' demands and the services provided. Proponents of the fiscal decentralization theorem predict that there will be a positive relationship between the variation in demands for government services across consumers within a metropolitan area (or state or country) and the degree of government decentralization or fragmentation.

This paper investigates whether or not a more diverse population will be associated with a greater number of relatively smaller local governments within a metropolitan area. In an extension of the previous studies, this study will make use of the availability of repeated observations on local government structure and metropolitan population characteristics over time to investigate the observed and unobserved determinants of local government structure. Unlike the previous studies, this study pays close attention to certain methodological issues such as the appropriateness of using pooled data from different years in panel data analysis and use of the appropriate econometric methods when the dependent variable is based on counts. Importantly, this paper improves upon past research by attempting to avoid spurious estimated relationships between government structure and population characteristics by restricting the analysis to those metropolitan areas that have not had their definitions or boundaries changed over time by the U.S. Census Bureau.

CHANGES IN LOCAL GOVERNMENT STRUCTURE

Table 1 summarizes the changes in local government structure (1) between 1952 and 1992. …

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