The City as a Law and Economic Subject

Local government law has fallen behind the times. Over the past two decades, economists have developed a deep understanding of “ag-glomeration economics,” or the study of how and why mobile citizens and firms locate in cities. Their work argues that people decide to move to cities because of the reduced transportation costs for goods, increased labor market depth, and intellectual spillovers cities provide—that is, in-dividuals and firms locate in cities in order to get the benefits of being near one another. Economically minded local government law scholars have largely ignored this burgeoning literature and instead have contin-ued to examine exclusively a separate set of benefits people get from their location decisions, the gains from “sorting.” As analyzed in the well-known Tiebout model, individuals move between local governments in a region in order to receive public policies that fit their preferences.This Article seeks to develop the framework for a modern law and economic method for analyzing local government law. Specifically, it claims that there is an inverse relationship between the gains from ag-glomeration and sorting. Having many small local governments, and en-abling individuals to choose their local public policies by sorting among them, affects the organization and density of people in metropolitan are-as, creating movement away from economically optimal location deci-sions. Sorting thus reduces agglomerative efficiency. Similarly, the ex-istence of agglomerative gains means that individuals are making location decisions for reasons other than matching their preferences for public policies. Agglomeration, therefore, causes a reduction in the effi-ciency of sorting.States face a trade-off between maximizing agglomerative and sort-ing efficiency in deciding how much power, and which responsibilities, to allocate to local governments. The need to balance these two conflicting sources of efficiency and changes in the nature of agglomerative gains over the last hundred years explains a great deal about the history of American local government law, current allocations of power between local governments and state legislatures, and judicial decisions about lo-cal governmental power. Further, understanding the systemic failures in the ways states balance this trade-off suggests a way to determine the proper role for the federal government in policy areas, like housing and transportation, that are primarily regulated at the local level.

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