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The Fiscal Common Pool Problem, Municipal Mergers, and Spillovers

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  • Nobuo Akai
  • Tsuyoshi Goto

Abstract

Mergers of local governments, commonly referred to as municipal mergers, have been widely implemented to internalize spillover effects. Many empirical studies point out that municipalities change the intertemporal budget allocation by increasing their debt issuance before mergers and they consider that this debt issuance is induced by the “fiscal common pool problem†because of pooled budgets after mergers. However, this phenomenon has yet to be analyzed theoretically. Therefore, this paper examines the mechanism of increased debt issuance before municipal mergers. We compare the debt issuance in the merger case with the level in the socially optimal and nonmerger cases. We find that the amount of debt issuance is larger in the merger case than in both other cases. The difference vanishes when spillovers are perfect.

Suggested Citation

  • Nobuo Akai & Tsuyoshi Goto, 2022. "The Fiscal Common Pool Problem, Municipal Mergers, and Spillovers," Public Finance Review, , vol. 50(3), pages 307-335, May.
    • Handle: RePEc:sae:pubfin:v:50:y:2022:i:3:p:307-335
    DOI: 10.1177/10911421221105519
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    More about this item

    Keywords

    fiscal common pool problem; merger; spillover; debt issuance; intertemporal budget allocation; fiscal federalism; JEL Classication: H72; H74; H81;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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