Coalition Formation and Political Decision Making: Evidence from Finnish Municipal Mergers

Government Institute for Economic Research Working Papers No. 19

60 Pages Posted: 14 Sep 2011

See all articles by Tuukka Saarimaa

Tuukka Saarimaa

Aalto University - School of Business; Aalto University - School of Engineering

Janne Tukiainen

affiliation not provided to SSRN

Date Written: December 20, 2010

Abstract

This paper analyzes empirically the coalition formation of local governments. We introduce a novel econometric strategy involving choice based sampling from a spatial network to allow for multi-partner mergers in our empirical analysis. We apply our method to recent municipality mergers in Finland. The mergers were decided voluntarily by municipal councils but the central government promoted mergers through a subsidy scheme. Our main interest lies on the association of local politics with the merger decisions. Moreover, we are able to estimate the causal effect of the subsidy scheme on the merger decisions using a regression discontinuity design. We find that the local political environment is relevant for the merger decision making. The results are consistent with politicians’ strategic behavior concerning private incentives on municipal employment possibilities and re-election. Furthermore, more concentrated political power at the local level seems to promote merging and different political parties hold different views concerning merging. The central government merger subsidy scheme has an effect on the type of mergers that took place. Overall, the results imply that local politics may hinder optimal coalition formation and that the central government may act as a corrective force by using an appropriate subsidy scheme.

Keywords: coalition formation, local politics, merger subsidy, choice based sampling, regression discontinuity design

JEL Classification: H71, H72, H77, C35

Suggested Citation

Saarimaa, Tuukka and Tukiainen, Janne, Coalition Formation and Political Decision Making: Evidence from Finnish Municipal Mergers (December 20, 2010). Government Institute for Economic Research Working Papers No. 19. Available at SSRN: https://ssrn.com/abstract=1926636 or http://dx.doi.org/10.2139/ssrn.1926636

Tuukka Saarimaa (Contact Author)

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

Aalto University - School of Engineering ( email )

PO BOX 14100
Aalto 00076
Finland

Janne Tukiainen

affiliation not provided to SSRN ( email )

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