A positive model of special district formation

Abstract

New special district governments account for most of the growth in the number of governments in the US over the past few decades. This paper presents a positive model of the formation of special districts that provide goods via an increasing-returns-to-scale technology, such as water or sewerage districts. The formation of a special district is modeled as a noncooperative game between a city and a suburb. A city's interest in and ability to annex surrounding suburbs is closely linked with incentives to form a special district. Cities which must gain approval from suburban areas in order to annex new territory may use access to cheaper publicly-provided goods as a `carrot' to induce surrounding areas to accept annexation. Therefore, growing cities without strong annexation powers will not agree to form a special district, so long as annexation is possible and desirable.