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Community Associations

Decentralizing Local Government Privately

Robert H. Nelson

May 2008, English

In this paper, Robert H. Nelson describes an important change in local governance structure under the U.S. federal system. There has been a rapid increase in the number of residence-based, voluntary community associations (CAs) formed by private developers to supplement municipal services and regulation. According to Nelson, about half of the new housing units between 1980 and 2000 were subject to the governance of a CA. In 2007, 20 percent of the U.S. population (or 60 million people) lived in CAs, whereas the 1970 estimate was only 1 percent. If this trend continues, Nelson argues, CAs may transform the traditional functions of local government. Future municipal responsibilities may be more regional in scope. They may include, for example, supplying water and sewer services, fire protection, citywide crime prevention, arterials, rapid transit systems, courts of law, and other public goods with significant economies of scale. Some aspects of land use regulation and the provision of microservices, such as garbage collection, street cleaning, and neighborhood security, will be undertaken by CAs.

What facilitates this change? Nelson asks. Could the growing private governance of neighborhood be integrated into the traditional local government structure? Nelson proposes a transaction-cost framework for analyzing these questions. He hypothesizes that CAs may have a comparative advantage over the traditional municipalities to minimize the transaction costs of (1) fine-tuning voting rules for matching local services with resident preferences; (2) negotiating for dispute resolutions at the neighborhood level; (3) controlling aesthetics; and (4) transferring the management responsibilities of the commons from one contractor to another. In contrast, municipalities can collect taxes and enforce statewide standards of land use regulation and local service provision more effectively than CAs.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2007 and is Chapter 13 of the book Fiscal Decentralization and Land Policies.