A Quasi-Market Theory of Local Development Competition

This paper describes and elaborates a quasi-market framework to integrate the diverse perspectives on local government development competition found in the economic development literatures. Within this framework local governments seek to obtain positive externalities associated with economic growth through provision of services and inducements to private firms in exchange for commitments of employment and investment. Business provides an enhanced tax base to provide services, employment and income growth as a consequence of private development location decisions. This quasi-market for development is limited by market failures, such as failures of competition, externalities, information asymmetry, and high transaction costs. Several government failures are also likely to result. These include preference aggregation failure, moral hazard problems, and bureaucratic failure. Given the social inefficiency of development competition that can result when these market and government failures are present, we investigate various paths that might be taken to correct these failures. The alternatives we examine include prohibitions or limitations on competition, metropolitan government, arrangements for regional cooperation, and reform of political and administrative institutions to reduce the divergence between governmental and community demand for growth. Better understanding of how the quasi-market for economic development works promises to enhance our understanding of the relationships between economic and political demands and local development with important implications for evaluation of local growth policy and development competition.