The interaction between public and private governments: An empirical analysis

Private governments, found in planned developments and condominiums, are increasingly common methods of delivering local services to residents. This paper provides the first empirical study of their impact on local public finance. A novel data set of homeowners' associations allows construction of a panel of private governments in California. Panel methods test whether public expenditures respond to private government prevalence. Estimates indicate that local governments lower spending moderately in response to private government activity, consistent with strategic substitution. The paper then examines various mechanisms to explain this downloading and shows that the substitutability between public and private providers is key to which services are downloaded. Evidence also suggests that the economies of scale in service production in small cities temper the offloading of public services to private governments.