Local government amalgamations and pre-merger overspending: Central naivety meets local opportunism

Abstract

ABSTRACT Amalgamation of local governments is an incentive for pre-merger overspending as the costs are transferred to the merged unit of the future. The article updates application of the common pool theory to such opportunistic pre-merger behavior. It studies Norway’s reform of the 2010s and paints a uniquely nuanced picture of pre-merger overspending, comparing fiscal policies before and after enactment of the reform among merging and non-merging municipalities. It provides corroboration that local governments that are about to merge overspend prior to the merger. New insights are gained into local governments’ differential incentives to allocate overspending to capital or current expenditure, and their opportunities to act on these incentives in the final and penultimate years before mergers are implemented. New insights are also gained into the differential incentive structures of junior and senior partners to a merger. Juniors overspend the most on current expenditure, while junior and senior partners overspend equally on capital expenditure. These insights not only have theoretical value but also practical applications.