Why Local Governments Do Not Maximize Profits : On the Value Added by the Representative Institutions of Town and City Governance

This paper provides an explanation for the lack of profit-maximizing governments and for widespread use of more or less representative forms of local governance based on economic, rather than political, considerations. The analytical part of the paper suggests that profit-maximizing governments suffer from a "proprietor's dilemma," which can be reduced by including a representative council with veto power over new taxes. Limited but costly mobility plays a role in the analysis, as does the fact that residents often make investments in a town that are difficult to relocate once made