The Role of the Public Sector in Local Development Finance: Evaluating Alternative Institutional Arrangements

Abstract

This article will develop a framework for the evaluation of alternative economic institutions and apply that framework to various arrangements for financing housing and local economic development. An institution is defined here as a set of property rights or rules for decision making; the framework for analyzing institutions derives from the work of John R. Commons [1924], Vincent Ostrom [1976], and Allan Schmid [1978], and is based on their notion that alternative specifications of property rights or decision rules will affect the nature of the outcomes produced by economic entities. Choice among alternative institutions then requires an evaluation of these outcomes and of the institutional processes themselves against some set of social value criteria. Here we draw upon some of the recent work in the area of institutionalist value theory. The framework is applied to the evaluation of two alternative institutional arrangements for the provision of debt and equity capital for investment in housing and in commercial and industrial enterprises: government regulation of private banks and creation of publicly owned banks. In recent years, a number of new institutions have arisen: the Federal Community Reinvestment Act, state anti-redlining statutes, state development banks and housing finance authorities, and state equity capital funds.