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The Effect of Property Tax Limitations on Residential Private Governments: The Case of Proposition 13

The proliferation of residential private governments, in the form of homeowners' associations, to deliver public services coincided with a period in which cities faced significant property tax limitations. Using panel data from California in the era of Proposition 13,1 test whether cities that were more tax constrained experienced higher rates of private government formation. The degree of constraint is measured by using the limitation's revenue sharing formula and by using crime to proxy for local service demand. I find the more a city is constrained, the higher is the membership in and the rate of growth of, private governments.