Collusion, Cooperation and Competition Among Local Governments in the U.S.

We propose a model that builds on Brennan and Buchanan and Tiebout to link the literature on federal grants to the literature on interlocal competition and on interlocal cooperation. Brennan and Buchanan model local Leviathans as competitive “price takers” in a metro "market." Failed collusion, due to collective action problems, is "solved" by federal grants-in-aid. We believe it is more accurate to model metro markets as a mix of monopolistic competition and oligopoly. Cities are heterogeneous in service bundles, similar to differentiated products in monopolistic competition. Collusion is not sought among cities with differentiated products. Similar cities in a market, however, are oligopolists. In a metro area, there are only a few cities that offer similar bundles of services, and these cities collude within their "oligopoly group." Third, unlike cities sometimes cooperate. Cooperation among unlike cities looks like a Hecksher-Olin model of trade. Cities “trade” with cities least like themselves to take advantage of differing “factor endowments,” which in cities mean historically-rooted advantages like cheaper access to natural resources or regional public assets or a sunk cost investment in a capital asset. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]