When do municipal consolidations reduce government expenditures? Evidence on the role of local government

Higher levels of government motivate municipal consolidations as a tool to increase efficiency in the local government sector, yet research shows consolidations typically fail to deliver the promised spending reductions. Since mergers often require significant changes to institutional structures, one potential explanation is that local decision makers can substantially influence the outcomes of the consolidations process. To explore this possibility, this paper contrasts “encouraged but voluntary” mergers with those that were “forced” on local governments in the state of New South Wales, Australia. Results show voluntary mergers resulted in a ten percent decline in total per capita expenditures, but forced consolidations failed to reduce spending across the board. The policy conclusion is decision makers considering structural reform should invest in obtaining the support and participation of local government decision makers.