Municipal annexation and local monopoly power

Abstract

We have found that the fiscal power of a city can be increased by extension of its borders within a land area that is homogeneous with respect to earning opportunities, even when numerous rival jurisdictions exist in the area. We hypothesized that extending municipal boundaries will have a positive effect on discretionary outlays and on expenditures per capita. The evidence presented supports these hypotheses. Furthermore, municipal wages appear to be significantly increased in cities experiencing annexation growth. Therefore, we would expect to find that municipal employees are more inclined to favor annexation than the rest of the electorate. From a policy standpoint, this study suggests that significant perverse effects on fiscal efficiency may follow adoption of legal reforms that facilitate the ability of municipalities to extend their borders, or that restrict the formation of new municipalities.