Analyzing the provision of local public services in the context of a market for local government services has yielded numerous important insights into local first behavior (Martin and Wagner, 1978;. Any change in local government structure -institutional or legal -can be examined for its effect on the competitive conditions in this market and the degree to which it promotes or retards centralization (monopoly) in the provision of government services. The major advantage of decentralized service provision in a metropolitan area is the broader choice of public services offered to voters as compared to a single, centralized provider 1 . Martin and Wagner (1978) use the model of intergovernmental service competition to analyze the effect of one specific structural change in municipal services markets in California -enactment of the Knox-Nisbet Act in 1963 which created Local Agency Formation Commissions (LAFCO) in 57 of the state's 58 counties. 2 Each LAFCO is composed of appointed representatives from existing local government jurisdictions -the county and cities -and has the authority to accept or reject any proposed boundary change by a city or special district, including incorporation, annexation, consolidation, or dissolution. In effect, existing jurisdictions are given control over entry into the local government services market. Martin and Wagner argued that the LAFCOs have used this authority over boundary changes to severely reduce the number of new incorporations in California and to erect substantial entry barriers to potential competitors in local public service markets. They predicted that the effect would be a rapid growth in government spending due to the enhancement of the monopoly power of existing jurisdictions. Their empirical tests gave some support to this hypothesis -the advent of LAFCO reduced new incorporations by 42 percent and raised the level of spending in California counties 35 percent above what it otherwise would have been.
The present study extends the initial work by Martin and Wagner. The LAFCO legislation not only reduced municipal incorporations, it also encouraged municipal boundary changes via annexation.