Administrative Consolidation and the Cost of State Capacity

This paper studies how administrative consolidation affects the performance and cost of fiscal capacity. While consolidation may reduce administrative costs by exploiting scale effects, it may also disrupt the accumulated organizational resources and routines through which governments collect taxes. We examine this trade-off, focusing on Japan’s Great Heisei Municipal Mergers, a large wave of municipal consolidation in the early 2000s. Using an event-study based on a difference-in-differences design, we find that mergers reduce tax collection rates beginning in the pre-legal-merger transition period. In contrast, tax administrative costs fall only after formal consolidation, consistent with economies of scale in tax administration. We further find that tax revenue collected per unit of administrative cost increases after consolidation despite the decline in collection rates. These findings show that administrative consolidation weakens the collection margin of fiscal capacity during organizational transition, while lowering the resource cost of raising revenue enough to improve overall cost-effectiveness. The results highlight a trade-off between the operational performance and cost-effectiveness of fiscal capacity.