The economic effects of local authority mergers: empirical evidence for German city regions

Abstract

Cooperation of neighbouring local authorities in the provision of regional public goods can be efficiency enhancing due to economies of scale, a better realisation of fiscal equivalence or dynamic efficiency gains. While the need for such cooperation between local authorities is undisputed, there are different positions concerning the form the cooperation should take. Some argue that local authority mergers are the most efficient and democratic strategy. Others argue that functional cooperation is more appropriate and that mergers reduce the welfare enhancing effects of competition between local authorities. Based on the conditions in Germany that can be interpreted as a natural experiment it is shown in a cross-section analysis that local authority mergers in monocentric city regions have indeed significant economic effects. All else equal the financial situation of city regions where the core and the hinterland are separate administrative districts is worse than in single district regions. Radical mergers of core cities and suburban towns in the 60s and 70s led to higher economic growth in the period 1980–1998.