Coalition formation and political decision making: Evidence from Finnish municipal mergers

Tuukka Saarimaa and Janne Tukiainen

No 19, Working Papers from VATT Institute for Economic Research

Abstract: This paper analyzes empirically the coalition formation of local governments. We introduce a novel econometric strategy involving choice based sampling from a spatial network to allow for multi-partner mergers in our empirical analysis. We apply our method to recent municipality mergers in Finland. The mergers were decided voluntarily by municipal councils but the central government promoted mergers through a subsidy scheme. Our main interest lies on the association of local politics with the merger decisions. Moreover, we are able to estimate the causal effect of the subsidy scheme on the merger decisions using a regression discontinuity design. We find that the local political environment is relevant for the merger decision making. The results are consistent with politicians' strategic behavior concerning private incentives on municipal employment possibilities and re-election. Furthermore, more concentrated political power at the local level seems to promote merging and different political parties hold different views concerning merging. The central government merger subsidy scheme has an effect on the type of mergers that took place. Overall, the results imply that local politics may hinder optimal coalition formation and that the central government may act as a corrective force by using an appropriate subsidy scheme.

Keywords: Coalition formation, Local politics, Merger subsidy, Choice based sampling, Regression discontinuity design, Local public economics, Kunnallistalous, Public services, Julkiset palvelut, Regional development, Aluekehitys, Effectiveness of public services, Julkisten palvelujen vaikuttavuus, C350 - Econometric Methods: Multiple/Simultaneous Equation Models; Multiple Variables: Discrete Regression and Qualitative Choice Models, H710 - State and Local Taxation, Subsidies, and Revenue, H720 - State and Local Budget and Expenditures, H770 - Intergovernmental Relations; Federalism, (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cdm, nep-pol and nep-ure
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Citations: View citations in EconPapers (6)

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