When Do Municipal Consolidations Reduce Government Expenditures? Evidence on the Role of Local Involvement

Abstract

Higher levels of government motivate municipal consolidations as a tool to increase efficiency in the local government sector, yet research shows that consolidations typically fail to deliver the promised spending reductions. Since mergers often require significant changes to institutional structures, one explanation is that local decision makers can substantially influence the outcomes of the consolidation process. To explore this possibility, this article contrasts "encouraged but voluntary" mergers with those that were "forced" on local governments in the state of New South Wales, Australia. Results show that voluntary mergers resulted in a 10 percent decline in total per capita expenditures, but forced consolidations failed to reduce spending across the board. The policy conclusion is that decision makers considering structural reform should invest in obtaining the support and participation of local government decision makers. Evidence for Practice• Local governments that opted in to consolidation were more likely to reduce expenditures than were governments where consolidation was imposed by a higher level of government. • Even when consolidation is voluntary, local officials appear to be hesitant to act to reduce expenditures in core sensitive areas such as employee costs. • Local involvement in the merger process is key to achieving cost savings. When considering consolidation, officials should consider how to involve local decision makers in the preparation and execution of the proposed merger.

Citizens’ Trade-offs in State Merger Decisions: Evidence from a Randomized Survey Experiment

“… Also Allers & Geertsema (2016) andReingewertz (2012) find significant negative effects of municipal mergers on administrative spending. However, most studies report insignificant effects(Hansen et al, 2014;Harjunen et al, 2019;Mughan, 2019;Rösel, 2017).…”

For the Benefit of Mr. Thompson: Organizations, Uncertainty, and Administrative Science

“…In addition to Wise and Witesman's () look at perverse privatization, Yang's attention to the negative externalities of fiscal problems demonstrates a case‐specific contagion effect of municipal bankruptcy on cities with borrower and bond‐specific similarities without a geographic proximity effect (Yang ). Mughan () explores the conditions under which municipal consolidations reduce government expenditures, finding that voluntary mergers reduced spending, while higher government‐forced consolidations did not.…”

The Effects of Sub-National Government Consolidations: Quasi-Experimental Evidence from a Large-Scale Danish Structural Reform

“…For Sweden, Hanes (2015) finds evidence of a Ushaped correlation between the amalgamation size and total per capita expenditure growth in Sweden. In contrast, for Australia, where local authorities provide "services to property", including maintenance of roads, water, sewage, and solid waste disposal, Mughan (2019) finds that voluntary and not forced mergers decrease partial expenditures. A few studies that amalgamations increase expenditures in most service categories in Finland, (Moisio and Uusitalo 2013), for fire, solid refuse, parks, and recreation services in Canada (Slack and Bird 2013), and labour market activation in Denmark (Blom-Hansen et al 2016).…”

“…Recent studies employ quasi-experimental designs, exploiting exogenous amalgamation and annexation reforms, to compare amalgamated and continuing local government jurisdictions across the time of the reforms (see Gendźwiłł, Kurniewicz, and Swianiewicz 2021 for a recent review). Three of the studies find a reduction in total expenditure per capita, including Israel (Reingewertz 2012), Sweden (Hanes 2015), and Australia (Mughan 2019). For Sweden, Hanes (2015) finds evidence of a Ushaped correlation between the amalgamation size and total per capita expenditure growth in Sweden.…”

“…The main objective of local government consolidations is to reap economies of scale reducing fixed operating and labour inputs per capita. Some studies find evidence of scale economies (Hanes 2015;Mughan 2019;Reingewertz 2012) or diseconomies of scale (Blom-Hansen et al 2016;Moisio and Uusitalo 2013;Slack and Bird 2013) in selected services, while most studies find no effect on service expenditures per capita, but substantial decreases in administrative cost (Allers and Geertsma 2016;Blesse and Baskaran 2016;Blom-Hansen et al 2016;Cobban 2017;Moisio and Uusitalo 2013). Except from a few studies (Mughan 2019;Reingenwertz 2012), most studies fail to disentangle the contribution from fixed and labour inputs.…”