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Local government consolidations: The impact of political transaction costs

  • Rune Sørensen

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    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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    File URL: http://hdl.handle.net/10.1007/s11127-006-7106-8
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    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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    1. 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.
    2. Bolton, Patrick & Roland, Gérard, 1995. "The Break up of Nations: A Political Economy Analysis," CEPR Discussion Papers 1225, C.E.P.R. Discussion Papers.
    3. 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.
    4. 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.
    5. Alberto Alesina & Enrico Spolaore, 1995. "On the Number and Size of Nations," NBER Working Papers 5050, National Bureau of Economic Research, Inc.
    6. 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.
    7. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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