Abstract
ABSTRACTIn many countries, local government size is increasingly thought to be insufficient to operate efficiently. Two possible solutions to this problem are amalgamation and intermunicipal cooperation. This paper applies a novel methodology to shed light on the efficiency implications of this choice. Using a unique and rich micro-level dataset, we find that intermunicipal organisations (IOs) in the Netherlands consistently pay higher interest rates than municipalities, while there is no economic reason to do so. We interpret this as a form of inefficiency. Municipal amalgamation, on the other hand, does not result in higher interest rates. Our analysis eliminates one possible explanation, dispersed ownership of IOs, as the number of partners cooperating in an IO does not affect interest rates (no ‘law of 1/n’). This leaves the introduction of extra hierarchical layers as a result of cooperation, and the ensuing reduction in monitoring, as the most probable explanation.
Highlights
In many countries, local governments are believed to have a suboptimal size for offering public services efficiently, because of scale economies and because of spending spillovers
Whereas previous studies on the effects of intermunicipal cooperation cover all costs of providing a single service, we focus on a single cost in a broad range of public services
Local government size is the subject of a lively debate
Summary
Local governments are believed to have a suboptimal size for offering public services efficiently, because of scale economies and because of spending spillovers. Bel and Warner (2015) survey the literature, and find just eight econometric studies of the effect of cooperation on public service costs or spending. The results of econometric studies on the effects of municipal amalgamations, carried out in several European countries and in Israel, are mixed as well (see Allers and Geertsema, forthcoming and the references therein). Empirical studies of the effects of cooperation or amalgamation often focus on spending levels. Higher spending may reflect rising public service levels, leaving efficiency unaffected. Empirical studies in this field suffer from two fundamental problems (Geys and Moesen 2009). Because all previous papers on the effects of intermunicipal cooperation focus on a service, waste, for which output is easy to quantify, the first problem does not necessarily apply to them. Leaves the introduction of extra hierarchical layers as a result of cooperation and the limited influence of municipality governments on IO boards as the most probable explanations
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