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| Abstract |
According to the literature, one of the advantages of local government consolidation is the delivery of efficient and effective public services through economies of scale. However, empirical works pro...vide mixed evidence on whether consolidation leads to cost reduction. This study explores the cost-reduction effects of local government consolidation using Japanese municipality data. Specifically, it considers a number of consolidation cases and distinguishes between the effects of economies of scale and other consolidation-related factors such as fiscal incentives to correctly evaluate the cost influence of consolidation. The study uses an instrumental variable methodology to deal with the endogeneity problem regarding consolidation decisions. The findings of this study are twofold. First, consolidation increases costs, and economies of scale do not lead to cost reduction. Second, municipal expenditure rises immediately after consolidation but gradually declines over time, though not through economies of scale.show more
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DP2013-08