Academic journal article Political Research Quarterly

Transaction Cost, Exchange Embeddedness, and Interlocal Cooperation in Local Public Goods Supply

Academic journal article Political Research Quarterly

Transaction Cost, Exchange Embeddedness, and Interlocal Cooperation in Local Public Goods Supply

Article excerpt

Abstract

The authors develop and test an integrated framework for understanding how transaction cost and exchange embeddedness contribute to the general problems of institutional collection action, contracting, and cooperation. An application of the framework to Georgia cities' interlocal cooperative behavior across multiple services suggests that interlocal cooperation provides a viable alternative to both private contracting and hierarchical arrangements and that transaction characteristics-asset specificity and measurement difficulties-and reciprocal exchange relationship predict the participation and the amount of interlocal cooperation. A curvilinear relationship was discovered between transaction characteristics and interlocal cooperation that extends Williamson's linear prediction.

Keywords

interlocal cooperation, exchange embeddedness, transaction cost, public service delivery, interlocal agreements, selforganizing

(ProQuest: ... denotes formulae omitted.)

The role of transaction costs in resolving private or collective exchange problems is well established (Williamson 1981; Ostrom 1990). What is less understood is how actors address transaction risks involving implicit or explicit agreements that are inherently incomplete given the bounded rationality of actors. Granovetter's (1985) claim that economic actors utilize exchange embeddedness to facilitate exchange has sparked interest in the contribution of transaction costs and exchange relationships to the general problems of institutional collective action, contracting, and cooperation (Feiock 2007; Carr, LeRoux, and Shrestha 2008; Feiock and Scholz 2010). Yet there is a surprising absence of an integrated theoretical framework to guide empirical studies in the field. In this article, we begin to fill this lacuna by integrating transaction cost and exchange embeddedness theories for studying cooperative behavior of cities in the provision of local public services.

In horizontal federalism, fragmented cities face systemic decision externalities commonly known as jurisdictional spillovers and scale inefficiency in the supply of public services. This creates an institutional collective action problem as affected cities, working in coordination or in collaboration, can produce mutual gain that otherwise would not be possible. Accordingly, these cities routinely engage in cooperative exchange, defined here as interlocal cooperation, with other local units for the supply of services (Seyler 1974; Atkins 1997; Warner and Hefetz 2001; Krueger and Bernick, forthcoming). Cities often use interlocal cooperation as a substitute for privatization (Bel and Fageda 2008). Interlocal cooperation is not a new phenomenon but has rapidly gained popularity among local units in the United States and other Western countries in recent years (Andersen and Pierre, forthcoming).

Early studies linked interlocal cooperation to socioeconomic similarity and geographic contiguity between communities (Dye et al. 1963; Liebman et al. 1963), differences in the scale of jurisdictions (Advisory Commission on Intergovernmental Relations 1985), frequent communication among local officials (Friesema 1971), and council-manager forms of government (Marando 1968). Later studies included the number of potential collaborators (Campbell and Glynn 1990), geographic density of governments (Post 2002), statutory provisions (Morgan and Hirlinger 1991), and competition between local governments (Krueger and McGuire 2005) as contributing factors. Alternative service delivery studies added fiscal pressure (Morgan, Hirlinger, and England 1988; Joassart- Marcelli and Musso 2005) and contract monitoring costs (Brown and Potoski 2003a) as possible influences on interlocal cooperation.

One primary theme often overlooked in the earlier studies is that the transaction characteristics of service and exchange embeddedness between transacting parties together affect interlocal cooperation. …

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