The annexation activity of municipalities is studied in a market framework. A sample of 659 municipalities of 25,000 or more population is used to analyze the effects of municipal government structure and annexation statutes on municipal government behavior. Both annexation laws and types of municipal governments are found to be significant determinants of the level of municipal annexation activity. Since some studies indicate that annexation activity affects municipal efficiency, these results have policy implications for state legislators who control the institutions under which municipalities operate. HEN DOUGLASS c. NORTH RECEIVED THE ALFRED NOBEL MEMORIAL Prize W in Economics in 1993, he lectured on the importance of political and economic institutions in economic performance (North 1993). Institutions provide the rules within which organizations function, including municipal government organizations. Unfortunately, few studies have been made which identify the impact of state and local institutions on municipal government behavior. None has been made in a framework that accounts for market forces that might influence annexation activity.The major function of municipal governments is to provide services, and their ability to provide services depends on the economic base, institutions, and political and social forces. The economic base of a municipality is a function of many factors, including the ability of a municipality to expand its boundaries (usually through annexation of fringe areas) to recapture higher income residents and businesses who have left the municipality and to capture new urban fringe residents who have migrated from other areas Annexation is an important issue for municipal governments because the relative ease by which a municipality can annex influences its ability to protect its economic base.' Moreover, the objectives and behavior of municipal governments are related to the phenomenon of urban sprawl and suburban development Gaines Liner is an associate professsor, and Rob Roy