2019/01 Merging city and suburban governments: A public choice perspective on the Norwegian local government reform

The administrative boundaries of the central city almost universally cover a smaller area than its functional boundaries. As mobility patterns go mainly into the central city, local governments in central cities supply public goods beyond their own residents. They should want to extend their boundaries in order to internalize more of these externalities, while suburban municipalities should oppose this. This implication is clear from a theoretical perspective, but can rarely be tested given that local government reform is infrequent and typically top-down. However, the 2014-2017 Norwegian municipal reform offers a rare opportunity for empirical evidence to test this proposition. The paper examines the merger decisions made by municipalities in all city regions in Norway. The analysis provides support for the proposition that central cities want to internalize more of the externalities from their public goods production, while suburban municipalities oppose this: First, central cities tend to have higher property tax rates and to provide more public goods compared to suburban municipalities. Second, central cities were much more interested in merging than suburban municipalities: while the central cities wanted to merge with a total of 75 suburban municipalities, only 15 of the latter were positive to merging with the central city.