Volunteering to be taxed: Business improvement districts and the extra-governmental provision of public safety

Abstract

When the median voter's preference sets the level of local public goods, some voters are left unsatisfied. Is there an institution by which subsets of voters can resolve the collective action problem and increase the local provision of public goods? If so, what are the consequences? In response to problems such as crime and vandalism, neighborhood property owners have established Business Improvement Districts (BIDs) to provide local public goods. When a BID is approved by a majority of property owners in a neighborhood, state law makes contributions to the BID budget mandatory. This resolution of the neighborhood's collective action problem reduces crime — BIDs in the city of Los Angeles are robustly associated with crime declines of 6 to 10%. Indeed, crime falls regardless of estimation technique: fixed effects; comparing BIDs to neighborhoods that considered, but did not adopt, BIDs; using propensity score matching; and comparing BIDs to their neighbors. Strikingly, these declines are purchased cheaply. Attributing all BID expenditure to violent crime reduction, and thus ignoring the impact of BID expenditure on many quality-of-life crimes, BIDs spend $21,000 to avert one violent crime. This higher bound estimate is substantially lower than the $57,000 social cost of a violent crime.