Does the Method of Amalgamation Affect Cost Inefficiency of the New Municipalities?

Abstract

Municipal amalgamation has been done in many countries in recent years as the result of a push to enlarge the size and coverage of local government units, which in turn is driven mainly by the prospect of economies of scale. However, while municipality amalgamation or boundary reform raises population size, it introduces organizational changes in the local government that might in-crease administrative inefficiency. The choice for the method of integration of administrative functions before amalgamation might affect to public expenditure after amalgamation. This study uses Japanese municipal-level data and argues for a relation between the choice for the method of integration of administrative functions and cost inefficiency after amalgamation. The results show that the fully distributed facility method is more likely to be adopted in a larger administrative ju-risdiction and in one with large differences in finances or political structures between amalga-mated sub-regions. Moreover, the results of stochastic frontier regression show that new munici-pality adopting fully distributed facility method can possibly increase inefficiency by expanding organizational slack because the new administration system will be insufficient integration of administrative functions.