Intermunicipal cooperation, municipal amalgamation and the price of credit

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.