Does Spatial Variation in Heterogeneity Matter? Assessing the Adoption Patterns of Business Improvement Districts

Because they supplement the municipal provision of local public goods, Business Improvement Districts (BIDs) provide an opportunity to examine the space, scope, and determinants of the provision of local public goods. A BID is formed when a group of merchants or commercial property owners in a neighborhood vote in favor of package of self-assessments and local public goods to be funded with those assessments. These districts solve a collective action problem in the provision of public goods because once a majority has voted in favor, participation is compulsory for all merchants or commercial property owners in the neighborhood. I use a unique dataset on adoption patterns of BIDs in California to test two main claims suggested by the theoretical literature: first, that businesses respond to individual heterogeneity that determines the quality of local public goods, and second, that the type of heterogeneity—overall or spatial—matters. In contrast to the literature on residents, this study finds at best a weak correlation between a city’s adoption of a BID and heterogeneity. In addition, despite the theoretical preference for spatial over overall heterogeneity, BIDs are not more likely to be adopted by spatially heterogeneous cities. Because public goods are critical determinants of economic growth, finding out how their level is set is critical to understanding overall economic well-being. In particular, research by this author (Brooks, 2005) and others (Calanog, 2004; Hoyt, 2005) has shown that a specific institution for providing local public goods, the Business Improvement District (BID), is effective in reducing crime. Because security and the other local public goods that BIDs provide are so important to economic well-being, it is of interest to know why BIDs are adopted some places and not others. Specifically, this article asks whether a city’s adoption of a BID can be explained by the prevailing hypothesis about public goods provision in the literature, which argues that supplementary provision should be driven by heterogeneity of demand. In California, a BID is formed when a group of business or commercial property owners in a neighborhood vote in favor of a package of taxes and expenditures to provide local public goods. Once a majority of owners vote in favor of establishing the district, BID taxes are binding upon all members, resolving the problem of collective action such a neighborhood would otherwise face in providing local public goods. BID revenues are generally spent on cleaning, marketing, and security. Though total BID expenditures are not large, they are locally sizeable; for example, though total BID expenditures are less than one percent of the total city budget in Los Angeles, in some neighborhoods BID expenditures more than double city expenditures. The preeminent strain of research on the level of local public goods argues that heterogeneity in demand for public goods lowers the level of their provision. Building on theoretical work by Alesina and Spolaore (1997), Alesina, Baquir, and Easterly (1999) show that more racially heterogeneous jurisdictions spend less, as a 1219 Review of Policy Research, Volume 23, Number 6 (2006) © 2006 by The Policy Studies Organization. All rights reserved. percentage of their budget, on productive public goods such as education, roads, and sewers. Using a similar division of public goods, Chaudhary (2005) shows that caste-heterogeneity is associated with lower levels of education spending across rural districts in colonial India. Additionally, Vigdor (2004) shows that people in racially, generationally, and socioeconomically heterogeneous communities are less likely to “undertake actions generating public benefits,” as measured by response to census forms. By studying the adoption patterns of BIDs, I can address three gaps in this literature. First, the literature has in general focused on the impact of preference heterogeneity on the quantity of local public goods provided—usually measured by spending—rather than on the quality. Though more expenditures on public goods should generally lead to higher quality public goods, the strength of this correlation should vary both by place and type of expenditure. Here I use an outcome measure of revealed preference—the adoption of an institution to supplement local public goods provision—which I relate to heterogeneity. By choosing to form a BID that adds to city services, a BID neighborhood signals that the quality of municipally provided services is insufficient for their needs given their budget. Second, the literature to date has used the index of fragmentation (or Hirfendahl index) almost exclusively to measure heterogeneity, as it captures the overall disparity of groups (e.g., racial groups) across categories. However, where the provision of public goods has an important local—local in space—component, a measure of heterogeneity that includes this spatial distribution should explain the level of public goods better than overall heterogeneity. Thus, theory argues that the dissimilarity index should explain supplemental local public goods provision better than the index of fragmentation, and that the interaction of the two indices should provide the most explanatory power of BID adoption. However, I do not find this to be the case. Finally, the literature to date has focused on the response of municipal citizens to heterogeneity. In addition to citizens, cities also have firms, and firms are important actors in determining city policy. Here I ask whether firms are affected by residential heterogeneity. A commercial property owner wants to maximize the stream of rent from his property, so his interest is in finding tenants to pay maximum rent. These business tenants maximize profits, which come from revenue of nearby residents. Thus, the aims of commercial property are the same as those of local residents. However, if each neighborhood is as heterogeneous as the city as a whole, then it is unlikely that any neighborhood will wish to supplement the municipally provided level of public goods. However, if neighborhoods are more homogeneous than the city as a whole—that is, if heterogeneity varies across space— neighborhoods with demand exceeding the municipally provided level of public goods should indeed desire to supplement. This article tests two main claims: first, that businesses respond to individual heterogeneity that determines the quality of local public goods, and second, that the type of heterogeneity—overall or spatial—matters. To this end, I combine neighborhood and city-level data from the decennial census, economic data from the economic census, government information from the census of governments, and data on crime from the Federal Bureau of Investigation (FBI). In addition, because there is no centralized repository of BID information, I conducted a survey to 1220 Leah Brooks