SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

JEL-codes: D72; E62; H70

24 pages, First version: April 26, 2006. Revised: February 28, 2007. Earlier revisions: September 19, 2006, September 19, 2006, November 28, 2006, November 28, 2006, February 28, 2007.

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