Welcome to the New—and Private—Neighborhood

Local government in a world of postmodern pluralism.

Robert Nelson from the April 2006 issue

(Page 2 of 3)

The unit owner in a neighborhood association is not only a customer but an investor—indeed, his home often constitutes a significant portion of his total financial assets. In an ordinary business corporation, mergers, acquisitions, and divestitures are a routine part of life; stockholders who disapprove of the way a corporation is managed can exit the organization simply by selling their shares on Wall Street.

The territorial aspect of a neighborhood complicates such processes of entry and exit. In a private community, a split of one group from the association would require a large supermajority vote and perhaps unanimous consent. In the public sector, such a rift would amount to an act of secession. Most states have provisions for “detachment” from the municipal corporation, but few detachments have occurred over the years, due in part to the high transaction costs associated with getting the state government’s approval.

In principle, the industrial organization of local government could be determined by a process of competition in the marketplace. Indeed, some students of urban affairs believe that a key to improved delivery of local public services rests in much greater flexibility among municipal boundaries. It should be easier, they argue, to assemble new governments covering larger areas and responsibilities from smaller units, or perhaps instead to divest smaller units from larger ones. One increasingly important area of law may be the appropriate provision of voting rules and other procedures for the approval of boundary changes and other structural adjustments to local government.

In the mid-1980s the political scientist Ronald Oakerson directed a study of the structures of local governance across the United States for the U.S. Advisory Commission on Intergovernmental Relations. Oakerson’s report concluded that much wider opportunity for experimentation in local service delivery is needed. As Oakerson put it, “Of central importance is the authority to create, modify, and dissolve [local service] provision units. The structure of the provision side—including the variety of provision units—depends on who can exercise this authority and under what conditions.” In this way, a Darwinian process of natural selection could shape what one might call the local government industry.

Oakerson also argued that we need more neighborhood-level institutions of government. “What is essential,” he wrote, “is that small-scale communities have the capability to organize themselves to act collectively with respect to common problems. This requires that locally defined communities be able to self-govern, exercising the powers of government within a limited sphere—limited in terms of both territory and the scope of authority.” Many goods and services, he noted, can best be “provided on a ‘neighborhood’ scale.” At present, however, the governance structures of metropolitan areas “tend to preclude or inhibit the development of smaller, nested provision units—neighborhood governments—within [wider city] boundaries.” As a result, neighborhood forms of governance are left out of the evolutionary competition to determine the future organization of local governments.

Oakerson said little about the radical political changes necessary to accommodate the formation of new local governments and to simplify the processes of boundary adjustment. Moreover, although he clearly recognized the importance of private associations, he did not necessarily see them as the preferred instrument of improved neighborhood governance. Yet one advantage of the neighborhood association is that its private status allows it greater ease of integration into the workings of a market economy—potentially allowing firms, for example, to buy and sell entry permission for new land uses within the neighborhood, or even to sell the whole neighborhood in one transaction. Properly written, an association’s constitution can allow for the routine expansion, contraction, termination, or other modification of the association and its boundaries as economic circumstances change, with a flexibility that would be more difficult to achieve in the public sector.

It would be helpful, for example, if more neighborhood constitutions provided for private divestitures of association subunits—in essence, for private secessions—should a contiguous subgroup within a given association want to leave. Municipal corporations, by contrast, are bound by state laws governing urban secession. Furthermore, neighborhood constitutions should stipulate a well-defined process for acquisitions of new areas.

Opened up in this manner, the evolutionary workings of a market process can be expected to yield new units of local governance—and not just at the neighborhood level. A larger unit of local government might be able to deliver services such as water and sewer at less cost, and it might have greater access to various forms of specialized professional knowledge. But it would be at a significant disadvantage in other respects. It is difficult to create a system of positive incentives that will motivate a large-city bureaucracy. Larger cities contain a greater diversity of citizens and thus experience greater discrepancies between individual service demands and the common levels of services typically provided citywide.

A very small unit also may not be ideal. The time investments required for full democratic participation and other transaction costs of neighborhood governance may be too large for each homeowner. Economies of scale in service delivery may be impossible to achieve. A neighborhood should, therefore, be large enough to offer a self-contained physical environment of high quality and to limit the democratic costs of governance.

The best way to resolve such tradeoffs, Oakerson argued, would be through an evolutionary process driven by competition among governmental forms within an overall framework of metropolitan governance.

Tiebout World

In 1956 the economist Charles Tiebout famously suggested that competition among units of local government could result in the delivery of public services roughly as efficiently as a market solution. Local taxes would function as prices; each person would choose a local community in which the common level of public services corresponded to his or her service demands at the given local “tax price.” If there were enough communities, and if it were possible to move from one to another at a sufficiently low cost, each person would be able to cluster with others of similar economic means and preferences. Indeed, in a hypothetical world of economic analysis in which there were no transaction costs at all—an assumption typical of economic modeling at the time Tiebout was writing—each person would in theory enter a community with an optimal level of public services and pay a property tax precisely equal to his or her share of the costs of these services. The system of local government would match demands and supplies for common services in a perfectly efficient way, like the market system for ordinary goods and services in economic theory.

The assumptions required to achieve a perfect Tiebout world are heroic, to say the least. It might be possible, however, to realize a very rough approximation, if there were a much wider flexibility in local governmental forms and boundaries than exists at present. Such flexibility could reduce significantly the transaction costs of metropolitan adjustments. Rather than physically moving to a new area at a high cost, a group of people already living in a neighborhood might be free to secede to form their own new unit of local government and thus obtain the collective services they want at this scale without exorbitant transaction costs.

If there were more room for such trial and error in the reorganization of local government, we would not need to prescribe an ideal size or arrangement for such governments. In the absence of such flexibility, a system of metropolitan governance is like a private industry in which the sizes and boundaries of business firms have been fixed by some outside decision maker. In such circumstances, it should not be surprising that metropolitan governance tends toward much less efficient forms. The standard processes of evolutionary change that drive market efficiency in business are absent in a metropolitan system comprising units of governance whose boundaries and other features were set in stone long ago.

There are other obstacles to the trial-and-error movement toward better local governance. Even where it is technically feasible and efficient, local governments are often prevented from selling their services to other towns or to the private sector. As Richard Briffault of Columbia Law School has written, in many cases municipalities “actually lack the authority to provide extra local services and require a special legislative grant of power before they are permitted to project their services across the local boundary line.” Local governments in general are supposed to avoid direct entry into private markets, so as to avoid the appearance of offering unfair competition to ordinary private businesses.