Overlapping Jurisdictions 4.PDF

This paper discusses the common pool problems that arise when multiple territorially overlapping governments share access to a common tax base. Contrary to a competitive Tiebout model in which increasing the number of governments in an area increases competition and improves efficiency, when jurisdictions overlap, increasing the number of governments worsens externalities and a “tragedy of the fiscal commons” results. The model is tested empirically with data from U.S. counties. The number of special purpose governments in a county is taken as a proxy for the degree of jurisdictional overlap. I find a strong positive relationship between the number of special districts and the size of the local public sector (whether measured in revenues or expenditures), after controlling for other relevant variables. Substantively, the “overlap effect” is on the order of 5 to 7 percent of the total budget. I explore, and reject, several alternative explanations for these findings, including the endogeneity of special district creation. This fiscal commons approach to the local public sector is particularly timely as special districts have become the most numerous and fastest-growing type of local government in the U.S. This approach poses a substantial challenge to conventional models based on a foundation of Tiebout-competition.