The avoidable costs of local governments'fragmentation in Italy

According to New Institutional Economics, institutions affect economic performance in that they reduce the transaction costs borne by economic players and change the payoffs for actions and investments. Contrary to what usually happens in literature, the relationship between institutions and economic performance is analyzed referring to a developed country as Italy and at the local scale. The hypothesis to be tested is that the excess of institutional fragmentation, with respect to the territorial boundaries of the real communities, increases avoidable operating costs. The paper assumes administrative expenses and those for government bodies as measure of the local governments’operating costs, analyzes its components and determinants estimating two municipal expenditure functions, and finally assesses the savings achievable introducing a territorial amalgamation of local governments coherent with socioeconomic phenomena and two different estimating criteria for financial requirements. For three ordinary regions the simulation is extended to different territorial arrangements.