A Theoretical Moldel of Shared Service Arrangements in Local Government

This article considers the problem of local government amalgamation from a theoretical perspective of an analytical model of local council mergers. In particular, we seek to investigate two important questions surrounding municipal amalgamation. Firstly, what are the main variables that influence the decision to form a ‘Union’ between two or more local authorities. And secondly, what are the major factors that determine the longevity or ‘stability’ of a Union. In this article, the term ‘Union’ describes the successful conclusion of an amalgamation process among two or more municipalities that brings about a new and larger local governmental entity . In order to investigate these two questions, we construct a theoretical model in which existing municipalities of whatever size can form a temporary (or stable) Union with the aim of supplying and managing various communal public services that either could not be supplied by each single municipality individually or that could be supplied inefficiently by each constituent local council. Municipalities entering into a Union thus lose a certain degree of budget control ability. This implies the need for financial incentives at the beginning of the Union formation process. We suggest a theoretical interpretation using a model characterized by social interaction (among ‘non-benevolent’ organizations and policy makers) in which individual payoffs are first estimated in an incomplete information context and then effective payoffs are evaluated over time. With respect to the Union formation process, our analysis shows how the interaction among policy-makers affects the decision to create a Union and may lead to Keynesian beauty contest situations in which the social evaluation of the Union evolves in an opposite direction compared with the private expectations of policy-makers. Our analysis of stability, reflecting the prospects of the long-run survival of the Union, shows that the Unions that are able to stimulate the economic growth are more likely to survive, above all in systems in which the capital depreciation rate is high since this seems to be the most important component of the rate of convergence to new steady-state in cases in which the Union is able to stimulate the economic growth of a system.