Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities

26 Pages Posted: 29 Jun 2007 Last revised: 12 Jan 2011

See all articles by Benny Geys

Benny Geys

Vrije Universiteit Brussel (VUB)

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research

Date Written: 2007

Abstract

German municipalities are expected to suffer from (often significant) population losses in the upcoming decades. We assess these local governments' vulnerability to the fiscal consequences of this demographic decline through two means (using a sample of 1021 municipalities in the state of Baden-Wuerttemberg). First, we consider local government cost efficiency. This indicates that there is a substantial divergence in efficiency despite a homogeneous institutional setting, leaving at least some - mainly smaller - municipalities vulnerable to adverse demographic/financial shocks. Secondly, we estimate the elasticity of local government cost functions to population size. We find that costs rise (fall) underproportionally with population size for small municipalities, whereas this is less the case for larger municipalities. This implies that especially small municipalities are vulnerable to increasing cost pressures under declining population. The overall implication is that large German municipalities (over 10.000 inhabitants) will more easily be able to cope with the expected population decline than smaller ones, supporting a case for boundary reviews or more extensive inter-communal cooperation.

Keywords: Demographic change, Efficiency, Local government performance, Stochastic frontier analysis, Economies of scale, Cost elasticity, German municipalities

JEL Classification: D61, H40

Suggested Citation

Geys, Benny and Heinemann, Friedrich and Kalb, Alexander, Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities (2007). ZEW - Centre for European Economic Research Discussion Paper No. 07-036, Available at SSRN: https://ssrn.com/abstract=997220 or http://dx.doi.org/10.2139/ssrn.997220

Benny Geys

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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