Special-Purpose Governments

Abstract

When one thinks of government, what comes to mind are familiar general-purpose entities like states, counties, cities, and townships. But more than half of the ninety thousand governments in the United States are strikingly different: they are “special-purpose” governments that do one thing, such as supply water, fight fire, or pick up the trash. These entities have expanded far more rapidly than any other form of government. Yet they remain understudied, and they present at least two puzzles. First, special-purpose governments are difficult to distinguish from entities that are typically regarded as business organizations—such as consumer cooperatives—and thus underscore the nebulous border between “public” and “private” enterprise. Where does that border lie? Second, special-purpose governments typically provide only one service, in sharp contrast to general-purpose governments. There is little in between the two poles—such as two-, three-, or four-purpose governments. Why?

This Article answers those questions—and, in so doing, offers a new framework for thinking about special-purpose governments. The fundamental difference between public and private enterprise exists not in the services provided or even the governance structure, but in how they are created: governments can compel membership and financial contributions in a given territory from the moment they are formed—in contrast to private cooperatives, which contract for membership and accept funds in exchange for the provision of services. Moreover, an overlooked reason why special-purpose governments may provide only one service flows from the efficiency benefits of having “owners” with relatively homogenous interests. Just as private agricultural cooperatives tend to involve a single crop—ensuring that controlling members will have convergent interests—special-purpose governments work best when they provide a single service for which all the members share common incentives. As a result, special-purpose governments have much in common with some private firms. But this is not to praise or justify these entities: the patchwork of laws governing special-purpose governments has not kept pace with the evolution of organizational law in private contexts. Private law may thus suggest reforms to let special-purpose governments achieve their unfulfilled potential.

Keywords: organizational law, corporate law, local government law, law and economics

JEL Classification: K00, H70, G30