For local governments, a polycentric system is one where you have multiple, partially overlapping types of local governments. The communities which through government jointly produce the waste services may be different from those which provide the schools or fire protection. There is good reason for this a priori, as there may be differences in preferences for these services or the cost of provision may be different. What makes sense as boundaries for a school district might not align with what works for a network of sewer systems. On the other hand, you can imagine goal conflicts and coordination problems occurring that result in unnecessary expenses (e.g. my city just repainted a road only to see the sewer utility rip it up the next day for some maintenance). These trade-offs were discussed extensively in this famous 1961 paper on metropolitan areas by Vincent Ostrom, Charles Tiebout, and Robert Warren. Polycentric governance is more generally discussed as an important adaptive management system for resolving commons property problems featured in Elinor Ostrom’s Nobel prize winning research.

Via Rob Greer (Texas A&M), Tima Moldogaziev (University of Georgia), and Tyler Scott (UC-Davis) in the International Journal of the Commons comes “Polycentric Governance and the Impact of Special Districts on Fiscal Commons.” Let’s start with the abstract:

Local government services are increasingly being provided in fragmented polycentric systems where the overlapping jurisdictions draw resources from the same fiscal base. Developing optimal policies for the efficient management of fiscal resources requires a consideration of the total underlying fiscal pool. In this study, we evaluate the impact that special purpose districts have on debt ratios at the county “common pool” level in the State of Georgia (U.S.) between 2005-2014. Empirical findings suggest that inclusion of all general government and special purpose debt for each county may at times result in a greater burden on fiscal common pool than existing rules permit. These results call into question the efficacy of fiscal policies in a polycentric governance system that neglect to account for debt levels for all actors within the confines of a single fiscal common pool unit. Results also show that total debt ratios are significantly affected by special districts that operate within boundaries of a single county. We find no evidence that independent special districts have a differential impact on fiscal common pools compared to their dependent counterparts. 

So, the classic Tragedy of the Commons framework for setting up an empirical test is that you have some kind of production function from a resource input, like fish production from a lake. A monopolist will fish sustainability to maximize the long-run productive value of the lake, but add a competitor and you get diminished long-run production (albeit, perhaps increased short-run) because neither is promised that they have rights to the future stock. Now maybe the two can come together to coordinate and cooperate to avoid this, but the coordination problem becomes increasingly difficult as the number of competitors increase. You get continuously increasing costs from effort to extract diminishing product.

In taxation, the logic of the commons is somewhat similar. Increasing the number of stakeholders with access to the same economic base will cause each individual unit to exert additional “tax effort” that jointly produce lower tax revenues than a singular monopoly government (e.g. See Figure 2 in this 1997 Russ Sobel paper).

Greer and colleagues extend a similar argument, pointing out that many of these forces can affect the amount of public debt (see their Section 3):

• Debt represents the borrowing of future revenues, but the ability to make a unique claim to these future revenues are less credible as you increase the number of overlapping local governments.
• Multiple overlapping governments will face revenue shortfalls because of the previously mentioned taxing problems, and thus will turn to debt.
• Special district formation in an area is often done to take on new debt, sometimes to circumvent state restrictions.
• More decentralized systems increase the set of specialized public goods, which increases demand (and debt to back) public services.

For all these reasons, Greer and colleagues say, you could expect increases in debt measures with the number of special districts (special districts being the source of within-county variation in the number of overlapping local governments). On page 18, they provide a plot of their credibility intervals (Bayesian confidence intervals). The mean of the interval suggests that adding a special district increases the total debt to assessed value ratio by 0.20 percentage points, which is about 7 percent of the mean debt observed. If you assume linearity in this effect, the median Georgia county with 6 special districts could cut their overall debt by about one-third if they consolidated to a single special district. The research design cannot tell us much about whether this would be welfare increasing or not because it does not discriminate among the potential mechanisms. But the findings lend credence to the idea that these concerns are worth further investigation because special district formation does seem to be changing the fiscal landscape.

See Also:

Raudla, Ringa. (2010). “Governing the Budgetary Commons: What Can We Learn from Elinor Ostrom?” European Journal of Law & Economics.