Splitting Up or Dancing Together? Local Institutional Structure and the Performance of Urban Areas

Abstract

This article analyzes institutional changes in local governance structures as determinants of wage premium and innovation capacity of urban areas. By combining individual and metropolitan area data for the US, we study the role of institutional fragmentation, related to the number of local governments operating in an area, and institutional coordination, stemming from the creation of authorities fostering the collaboration of local governments. Our findings suggest that more fragmented institutional landmarks do not benefit the wage competitiveness and innovativeness of urban areas. If anything, they harm them. Conversely, stronger coordination among local governments boosts the productivity of functional regions by increasing their wage premium and improving their capacity to innovate. Coordination agreements between different counties or municipalities are especially relevant in the case of urban areas modifying their functional borders over time. These findings provide key insights into the economic effects of reforming the governance structure of metropolitan areas.