On the Relationship between Authority Size and the Costs of Providing Local Services: Lessons for the Design of Intergovernmental Transfers in Spain
Unconditional transfers to local governments in Spain are distributed mainly according to weighted population, with weights rising with population size to account for the higher expenditure responsibilities and needs of bigger municipalities. The authors evaluate the appropriateness of these weights and estimate an expenditure equation with a data set covering more than 2,500 Spanish municipalities in 1999, and the use of a piecewise linear function accounts for the possible nonlinear relationship between costs and population size. The results identify important scale economies for the smallest local authorities and growing per capita costs for higher population sizes. However, the growth in per capita costs is much lower than the one implicit in the weights used in the distribution of transfers.
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