Transaction Cost, Exchange Embeddedness, and Interlocal Cooperation in Local Public Goods Supply

Abstract

The authors develop and test an integrated framework for understanding how transaction cost and exchange embeddedness contribute to the general problems of institutional collection action, contracting, and cooperation. An application of the framework to Georgia cities’ interlocal cooperative behavior across multiple services suggests that interlocal cooperation provides a viable alternative to both private contracting and hierarchical arrangements and that transaction characteristics—asset specificity and measurement difficulties—and reciprocal exchange relationship predict the participation and the amount of interlocal cooperation. A curvilinear relationship was discovered between transaction characteristics and interlocal cooperation that extends Williamson’s linear prediction.

Does Cooperation Reduce Service Delivery Costs? Evidence from Residential Solid Waste Services

“…This explains that larger municipalities tend to cooperate less often because they may achieve scale economies by themselves, consistent with results in Warner and Hefetz (2002) and Carr, LeRoux and Shrestha (2009). Finally, cooperation may be less likely when the supervision of the service is more complex (that is, when population of the municipality is more dispersed) and when the coordination with the county may be also more complex (when major and the county's chair are from a different political party), all of this is consistent with findings in Shrestha and Feiock (2011) on transaction costs and on reciprocal exchange, and results in LeRoux, Brandenburger and Pandey (2010) on social networks and cooperation.…”

“…As a proxy for output we take the population of the municipality, according to the 2008 municipal register of inhabitants. 11 A negative relationship is expected between population and the decision to delegate the delivery of the service at the supra-municipal level, consistent with results in Warner and Hefetz (2002), Bel and Costas (2006), Bel and Fageda (2008), and Shrestha and Feiock (2011). A major motivation for a municipalitity to cooperate with other municipalities has to do with the economies of scale.…”

“…Indeed, greater dispersion makes more difficult to ensure that the service is properly provided, thus increasing transaction costs from cooperation. Transaction cost are negatively related to cooperation (Shrestha and Feiock, 2011), thus dispersion could spur the local government to maintain the provision of the service within the own jurisdiction. Thus, the expected effect of the variable of dispersion on the likelihood of cooperation is negative.…”

“…analyzing the cooperation decision, as in Shrestha and Feiock (2011). A municipality's financial difficulties may constitute a decisive factor in the decision to the delegate the delivery of the service, especially in small municipalities.…”

“…Other studies on factors influencing interlocal cooperation by LeRoux (2007) and LeRoux, Brandenburger and Pandey (2010) find that fiscal and wealth reasons do not seem to play a role, other city and regional characteristics might be influential, and social networks might be as well. In a more recent study, Shrestha and Feiock (2011) analyze interlocal agreement of different types, typically either pay-for-service (contracting to another government) or co-financing production arrangements with other local governments. They empirically study cities' service delivery mode choice and level of interlocal cooperation across multiple services, and find that interlocal cooperation is shaped by the nature and the degree of transaction risks as well as by reciprocal exchange relationships.…”