Studies of local governance structures have a long history in urban politics. The early literature tended to cast the choice as one between a highly fragmented local government system and a centralized, consolidated one (Ostrom, Tiebout, and Warren 1961; Bish and Ostrom 1973). The consolidated system was expected to be efficient and effective in service delivery, capturing economies of scale and scope as well as matching government boundaries to the level needed to address large-scale problems. The relatively infrequent adoption of these centralized government forms, however, highlighted the political obstacles in implementation. Local governments and residents often objected to the reduced local autonomy and voted down consolidation efforts. This left the fragmented government system as the only apparently feasible governance option (Carr and Feiock 2004).

The fragmented arrangement mirrored the private marketplace, with all of its corresponding advantages and limitations. Each local government offered its combination of services for a particular tax price, allowing households to choose their preferred product quality, mix, and price. Competition for a mobile tax base would lead to efficient service provision, resulting in the lowest price for a given quality of service and the highest customer satisfaction. The limitation of this market-based system is its inability to deal with standard market failures. Local governments do not necessarily work together to provide public goods; their actions lead to externalities or spillovers affecting their neighbors; and economies of scale are missed when a monopolistic governance structure is ruled out.