Scale economies in local public administration

Abstract

A renewed interest in decentralisation has profoundly affected local public governance around the world. Faced with an increasing number of tasks, Dutch municipalities have recently sought physical centralisation, merging into larger jurisdictions in order to target new policy areas more effectively and cost efficiently. Is such a policy of physical centralisation wise? We study economies of scale in local public administration, and find – given transfer payments from central government and current cooperation between municipalities and after controlling for geographical, demographic and socioeconomic variables – substantial unused scale economies of 17% for the average municipality. Between 2005 and 2014 the optimum size of municipalities increases from around 49,000 to 66,260 inhabitants, pointing at an increased importance of fixed costs relative to variable costs in local public administration.