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Are larger municipalities economically efficient?

Posted November 24, 2014

What is the best size of good political system? Probably, no single study can single-handedly answer this difficult multi-dimensional question. However, many researchers are trying to solve this empirical puzzle piece by piece. Recent analysis conducted by Danish scientists explores whether enlargement political units pay off?

Picture: Office Politics: A Rise to the Top. Image credit: Alex Proimos via Flickr, CC BY-NC 2.0.

Picture: Office Politics: A Rise to the Top. Image credit: Alex Proimos via Flickr, CC BY-NC 2.0.

“For many years, economists have argued that small entities create the potential for welfare gains because public services can be better tailored to local preferences or because citizens can move to localities that offer the ideal tax-service package.  However, an equally long-lived counterargument holds that large jurisdictions are more cost-effective due to economies of scale in the production of many public functions,” the authors of the article published in the American Journal of Political Science explain. However, it is always hard to test such macro-sociological theories.

Fortunately, Danish government carried out large quasi-experiment which sheds light on the relationship between size of a political unit and its economic efficiency. More than 200 municipalities were combined into 66 new administrative entities between 2005 and 2011. Interestingly, 32 regions managed to avoid centralization. This reform created experimental and control groups and provided information about pre- and post-reform situation.

Scholars found considerable support for the view that larger municipalities are economically beneficial. “Increases in jurisdiction size lead to lower administrative costs per capita. An assessment of the substantive significance of the findings follows. We estimate the average scale effect to 10% of administrative costs, a quite dramatic effect,” the researchers report.

However, these results can be generalized only with caution. Number of inhabitants in Danish municipalities ranges from 5000 to 100 000. Effect of centralization can be different in smaller or larger political units. Finally, scientists emphasize that this is only one piece of puzzle and more elements can be included into definition of successful political system.

“Welfare gains may be sacrificed because reducing the number of municipalities makes it more difficult to tailor public services to local preferences and offers citizens fewer tax-service packages to choose from when they decide where to live,” they note.

Article: Blom-Hansen, J., Houlberg, K. and Serritzlew, S., 2014, Size, Democracy, and the Economic Costs of Running the Political System. American Journal of Political Science, 58: 790–803. doi: 10.1111/ajps.12096, source link.

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