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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 626:
Do Politicians Free-ride? - an empirical test of the common pool model

Björn Tyrefors ()

Abstract: In the twentieth century there was a significant trend towards larger local governments through amalgamations in the western world. Amalgamations provide potential economic benefits but might also give rise to costs driven by opportunistic political behavior. This study uses a compulsory amalgamation reform of municipalities in Sweden to test for such behavior. The reform gives a local government incentives to accumulate debt before the amalgamation takes place, since the cost will be shared by all tax payers in the new municipality. The strength of this incentive to free ride will be determined by the locality's population size, relative to the future size of the new locality. We find an economically large and statistically significant free riding effect and the result is robust.

Keywords: common pool; amalgamations; free riding; local government; difference-in-difference; (follow links to similar papers)

JEL-Codes: D72; E62; H70; (follow links to similar papers)

24 pages, April 26, 2006, Revised February 28, 2007

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