Basolo, Huang / CITIES AND ECONOMIC DEVELOPMENT
Tiebout’s (1956) work generated a considerable response from scholars. In fact, his public choice argument influenced decades of research about public policy making (Bish & Ostrom, 1973; Ostrom, Bish, & Ostrom, 1988). The most influential extension of Tiebout’s argument was proffered by Paul Peterson (1981). Peterson developed the theoretical structure for the city limits story. His argument relaxed Tiebout’s assumptions, while making similar claims about the behav- ior of individuals. Although acknowledging imperfect information, Peterson argued that individu- als weigh the costs and benefits of local government services in their residential location decisions. He asserted that city officials recognize the import of these individual decisions. Furthermore, offi- cials are primarily interested in the strength of their city’s economy and, therefore, compete with other cities to retain and attract middle- and upper-income households and businesses. These two conditions, the mobility of residents, individuals and businesses, and the concomitant intercity competition, result in limited policy making. Specifically, Peterson argued that cities will prefer developmental policies, which seek to build the local economy, to redistributive policies.
Peterson’s (1981) city limits story spurred a number of empirical investigations into local policy making. Mark Schneider (1989), for example, examined the role of intercity competition on differ- ent types of policy making in suburban cities. Beginning with Peterson’s premise, Schneider asserted, “It is the relationship between the above-average income community member and the local benefit-cost ratio which informs the interests of local governments” (p. 201). He recognized a competitive local market for public goods and placed businesses and residents on the demand side of the market and elected officials and professional bureaucrats on the supply side. Schneider underscored the effects of different types of policies on a city’s benefit-cost ratio. Economic self- interest ensures developmental policies will be preferred to redistributive policies. Furthermore, Schneider emphasized that “the degree of competition in the local market” (p. 42) influences the level of support for different types of local policies. Using Peterson’s argument, Schneider posited, “Competition to lure attractive, fiscally productive individuals, families, and firms increases the incentives of local governments to invest in the developmental services which will appeal to them” (pp. 71-72).
Schneider (1989) conducted numerous multiple regression analyses on pooled, cross-sectional data from suburban cities. For the developmental policy model, he specified developmental expen- ditures as a function of demographic, economic composition, intergovernmental, fiscal, and com- petition factors. The model produced an adjusted R2 of 48% and had a statistically significant and negative coefficient for the borders competition measure (defined as the number of cities contigu- ous to each city in the sample). Schneider concluded that the results “provide some evidence to support . . . Peterson’s argument” (p. 78). The negative finding for competition seems puzzling given an expectation that cities will favor developmental services in more competitive local mar- kets. Two reasons may account for this finding. First, Schneider defined developmental services expenditures as outlays for infrastructure such as streets, sewers, and transportation. This operationalization of developmental policy captures only a single dimension of the concept. Expenditures specifically on economic development most likely would capture more aggressive developmental strategies. Second, as Schneider noted, his findings suggest that competition limits public expenditures across policy areas as elected officials seek to maintain lower costs.
Schneider (1989) examined policy areas in separate models, which limits direct comparison, and used a broad definition of developmental policy. Basolo (2000), however, tested the public choice thesis by comparing economic development to affordable housing expenditures in a cross section of U.S. cities. She specified a logistic regression model with the ratio of economic develop- ment to affordable housing expenditures as the dependent variable coded as a ratio above 1 or a ratio equal to or below 1. Her independent variables included intercity competition (measured as the number of cities in a sample city’s metropolitan statistical area), political influence, and institu- tional and demographic factors. The coefficient for the competition variable was positive and sta- tistically significant, indicating that as intercity competition increased, cities were more likely to spend more on economic development than on affordable housing. Several researchers have applied public choice theory to studies of local economic development. A number of these studies are empirical without an explicit theoretical base (Wolman, 1996). However, some studies implic- itly tie their investigation to public choice theory by considering competition as an explanatory