Municipal Fragmentation and Local Financial Condition

Hyunggun Park

doi:10.24193/tras.64e.7

Abstract

A sizeable literature investigates how intergovernmental competition affects various fiscal outcomes in a fragmented local landscape. However, it remains untested how the fragmentation affects the outcomes simultaneously. This study addresses the issue by condensing individual outcomes into a multifaceted concept of financial condition. Utilizing a pooled cross-sectional time-series approach on the metropolitan statistical areas in the U.S between 1972 and 2017, this study tests how financial condition of municipalities varies by competition among them. The finding exhibit adverse effects on their financial condition when a greater number of municipalities is identified.

Highlights

Local governments decide which and how much services to produce with different tax authorities, and citizens shop for packages of taxes and services from one jurisdiction to another
The factor analysis procedure generates a continuous variable of financial condition score, of which an average value of zero indicates that an metropolitan statistical area (MSA)’s financial condition score above the value represents the fiscally healthier condition of consisting municipalities than the national average each year
This study aims to test the effects of municipal fragmentation on their financial condition, the ability to meet financial and service obligations for citizens

Summary

Introduction

Local governments decide which and how much services to produce with different tax authorities, and citizens shop for packages of taxes and services from one jurisdiction to another. Numerous governments satisfy citizens’ heterogeneous service demands more effectively than a few, as a larger number of such local authorities provide distinctive tax and service packages for the citizens (Schneider, 1989; Tiebout, 1956). Citizens may compare the tax and service packages across jurisdictions, signaling governments to provide popularly appealing packages — more services and lower tax rates. Competition pressures local governments to manage the allocation of limited public resources, to lower the service production cost, and reduce the size of their organizations, thereby achieving greater efficiency to survive on the competitive market of public goods and services (Brennan and Buchanan, 1980)

Objectives

Results

Conclusion