Intermunicipal cooperation, municipal amalgamation and the price of credit

Abstract

In many countries, local government size is increasingly thought to be insufficient to operate efficiently. Two possible solutions to this problem are amalgamation and intermunicipal cooperation. This paper applies a novel methodology to shed light on the efficiency implications of this choice. Using a unique and rich micro-level dataset, we find that intermunicipal organisations (IOs) in the Netherlands consistently pay higher interest rates than municipalities, while there is no economic reason to do so. We interpret this as a form of inefficiency. Municipal amalgamation, on the other hand, does not result in higher interest rates. Our analysis eliminates one possible explanation, dispersed ownership of IOs, as the number of partners cooperating in an IO does not affect interest rates (no ‘law of 1/n’). This leaves the introduction of extra hierarchical layers as a result of cooperation, and the ensuing reduction in monitoring, as the most probable explanation.