Working Paper No. 09-47:
The City as a Law and Economic Subject
Date Posted: September 2009
Abstract (below) | Full text (most recent) on SSRN
Local government law has fallen behind the times. Over the past two decades, economists have developed a deep understanding of “agglomeration economics,” or the study of how and why mobile citizens and firms locate in cities. Their work argues that people decide to move to cities because of the reduced transportation costs for goods, increased labor market depth, and intellectual spillovers cities provide – that is, individuals and firms locate in cities in order to get the benefits of being near one another. Economically-minded local government law scholars have ignored this burgeoning literature and instead have continued to examine exclusively a separate set of benefits people get from their location decisions, the gains from “sorting.” As analyzed in the well-known Tiebout model, individuals move between local governments in a region in order to receive public policies that fit their preferences.
This paper seeks to develop the framework for a modern law and economic method for analyzing local governmental law. Specifically, it claims that there is an inverse relationship between the gains from agglomeration and sorting. Having many small local governments, and enabling individuals to choose their local public policies by sorting among them, affects the organization and density of people in metropolitan areas, creating movement away from economically-optimal location decisions. Sorting thus reduces agglomerative efficiency. Similarly, the existence of agglomerative gains means that individuals are making location decisions for reasons other than matching their preferences for public policies. Agglomeration therefore causes a reduction in the efficiency of sorting.
States face a tradeoff between maximizing agglomerative and sorting efficiency in deciding how much power, and which responsibilities, to allocate to local governments. The need to balance these two conflicting sources of efficiency and changes in the nature of agglomerative gains over the last hundred years explains a great deal about the history of American local government law, current allocations of power between local governments and state legislatures, judicial decisions about local governmental power and the proper role for the federal government in policy areas, like housing and transportation, that are primarily regulated at the local level.