Common Pool Problems in Voluntary Municipal Mergers

Abstract

We analyze free-riding behavior by Finnish municipalities prior to municipal mergers. The merger process creates a temporary common pool problem, which arises because of a delay from the initial merger decision to the actual merger. Using a difference-in-differences strategy, we find large responses to free-riding incentives. Consistent with the "law of 1/n", the stronger the free-riding incentive a municipality faced, the more it increased its per capita debt and used up its cash reserves. These funds were spent mostly on investment and current expenditures. The results are somewhat surprising because the mergers were agreed upon voluntarily.

Do mergers of large local governments reduce expenditures? – Evidence from Germany using the synthetic control method

“…The findings neither indicate decreases in total expenditures, nor in main expenditure categories. Given the substantial political costs of mergers, e.g., decreases in voter turnout (Fritz and Feld 2015), reductions in satisfaction with the local government (Hansen 2015), or common pool problems (Hinnerich 2009, Saarimaa andTukiainen 2015), net benefits of local government mergers seem to be at least very low. 22 The results of Ems (2016) indicate that political participation in Saxon district councils after the 2008 mergers suffers to some extent from increased time-consuming travel costs and complexity.…”

Do municipal mergers reduce costs? Evidence from a German federal state

“…Opportunistic behavior has been previously documented for expenditures (Hansen, 2014), debt, and assets (Jordahl and Liang, 2010;Hinnerich, 2009;Saarimaa and Tukiainen, 2015), or budget overruns (Blom-Hansen, 2010). There is also evidence for common pool problems prior to municipal mergers for Japanese municipalities (Nakazawa, 2013 In practice, municipalities in all states are responsible for the provision of a broad range of public goods and services.…”

“…That is, any debt accumulated by the pre-merger municipalities has to be repaid by the post-merger municipality, and thus in part by the other municipalities that were part of a merger (Hinnerich, 2009;Saarimaa and Tukiainen, 2015). Consequently, the decline in expenditures after compulsory mergers may be simply a return to the norm rather than indicative of cost savings.…”

“…8 A related literature studies how fiscal variables evolve before mergers, for example Jordahl and Liang (2010), Hinnerich (2009), Nakazawa (2013, Saarimaa and Tukiainen (2015), Hansen (2014) and Blom-Hansen (2010).…”

Do Municipal Mergers Reduce Costs? Evidence from a German Federal State

“…Opportunistic behavior has been previously documented for expenditures (Hansen, 2014), debt, and assets (Jordahl and Liang, 2010;Hinnerich, 2009;Saarimaa and Tukiainen, 2015), or budget overruns (Blom- Hansen, 2010). There is also evidence for common pool problems prior to municipal mergers for Japanese municipalities (Nakazawa, 2013 14 13 Germany has a complex federal structure of governance, but consists mainly of three governmental tiers.…”