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Local government consolidations: The impact of political transaction costs

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  • Rune Sørensen

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    Abstract

    Local government in Norway comprises a large number of small municipalities. Cost efficiency can be improved by consolidating local authorities, and central government has designed a framework to stimulate voluntary mergers. Existing theories suggest that political transaction costs will impede consolidations. (1) Generous grants compensate diseconomies of scale. Central government has promised small municipalities that grant levels will be maintained, but policy promises may not be credible. (2) Property rights to local revenues are nullified when consolidations have been implemented. High-revenue municipalities will therefore go against merger with a poorer neighbor. (3) A consolidated local council may be composed of different political parties, and it may therefore pursue other policies than an existing council. Expected changes in party strength can lead municipalities to oppose a proposed consolidation. (4) Senior politicians are less likely to support mergers, particularly if they come from small polities. We offer an explicit test of these propositions based on data for Norwegian local government. Elected politicians and administrative leaders are more interested in consolidating when efficiency gains are large. Local revenue disparities and to some extent dissimilar party preferences are significant impediments to voluntary mergers. Additionally, smaller municipalities are often prepared to sacrifice some efficiency gain to remain independent polities. Copyright Springer Science + Business Media, Inc. 2006

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    Bibliographic Info

    Article provided by Springer in its journal Public Choice.

    Volume (Year): 127 (2006)
    Issue (Month): 1 (April)
    Pages: 75-95

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    Handle: RePEc:kap:pubcho:v:127:y:2006:i:1:p:75-95

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    Web page: http://www.springerlink.com/link.asp?id=100332

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    1. Bolton, Patrick & Roland, Gérard, 1995. "The Break up of Nations: A Political Economy Analysis," CEPR Discussion Papers 1225, C.E.P.R. Discussion Papers.
    2. Borge, Lars-Erik, 1995. " Economic and Political Determinants of Fee Income in Norwegian Local Governments," Public Choice, Springer, vol. 83(3-4), pages 353-73, June.
    3. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
    4. Johansson, Eva, 2003. "Intergovernmental grants as a tactical instrument: empirical evidence from Swedish municipalities," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 883-915, May.
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    6. Borge, Lars-Erik & Sorensen, Rune J, 2002. " Aggregating Spending Preferences: An Empirical Analysis of Party Preferences in Norwegian Local Governments," Public Choice, Springer, vol. 110(3-4), pages 225-43, March.
    7. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
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    Cited by:
    1. Edoardo Di Porto & Vincent Merlin & Sonia Paty, 2013. "Cooperation among local governments to deliver public services : a "structural" bivariate response model with fixed effects and endogenous covariate," Working Papers halshs-00787600, HAL.
    2. Dur, Robert & Staal, Klaas, 2006. "Local Public Good Provision, Municipal Consolidation, and National Transfers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 86, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Miyazaki, Takeshi, 2013. "Municipal Consolidation and Local Government Behavior: Evidence from Japanese Voting Data on Merger Referenda," Discussion Paper Series 588, Institute of Economic Research, Hitotsubashi University.

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