Common Pool Problems in Voluntary Municipal Mergers

Government Institute for Economic Research Working Papers No. 53

35 Pages Posted: 2 Jan 2014

See all articles by Tuukka Saarimaa

Tuukka Saarimaa

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

Janne Tukiainen

VATT Institute for Economic Research; University of Turku - Turku School of Business - Department of Economics

Date Written: December 27, 2013

Abstract

We analyze free-riding behavior by Finnish municipalities prior to municipal mergers. The merger process creates a temporary common pool problem, which arises because of a delay from the initial merger decision to the actual merger. Using a difference-in-differences strategy, we find large responses to free riding incentives. Consistent with the “law of 1/n”, the stronger the free-riding incentive a municipality faced, the more it increased its per capita debt and used up its cash reserves. These funds were spent mostly on investment and current expenditures. The results are somewhat surprising because the mergers were agreed upon voluntarily.

Keywords: Common pool, difference-in-differences, free-riding, law of 1/n, municipality mergers

JEL Classification: H720, D720, H730, H770

Suggested Citation

Saarimaa, Tuukka and Tukiainen, Janne, Common Pool Problems in Voluntary Municipal Mergers (December 27, 2013). Government Institute for Economic Research Working Papers No. 53. Available at SSRN: https://ssrn.com/abstract=2373910 or http://dx.doi.org/10.2139/ssrn.2373910

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

VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00101
Finland

University of Turku - Turku School of Business - Department of Economics ( email )

Rehtorinpellonkatu 3
Turku, 20014
Finland

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