Municipal Merger and Debt Issuance in South African Municipality

Tsuyoshi Goto, Sandra Sekgetle and Takashi Kuramoto
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Sandra Sekgetle: Senior Economist, the National Treasury of South Africa
Takashi Kuramoto: Associate Professor, Hirao School of Management, Konan University

No 19E001, OSIPP Discussion Paper from Osaka School of International Public Policy, Osaka University

Abstract: Employing South African data and Difference-In-Difference (DID) method, this paper investigates whether the free-ride behaviour was taken by municipalities which faced their mergers before the municipal demarcation changes are executed. With several developed countries' data, many research show that there are opportunistic free-ride behaviours of municipalities such as over-issuance of debt before their mergers since the burden of them will be shared by newly constructed municipalities. In spite of these fruits of research, few solution is suggested in the literature. Considering this, we focus on the South African municipal mergers, where the upper government of municipalities implemented the policy for pre-merged municipalities to suspend new contracts involving the borrowing contract before the mergers. As a result of DID analysis, we show that South African municipalities did decrease the amount of borrowings before their mergers. This result is an opposite result considering the previous empirical researches and means that the proper policy for municipal mergers can prevent the fiscal common pool problem caused by free-ride behavior. In addition, this paper shed the light to utilize the data of developing countries and is the first paper to show there were reductions of borrowings before municipal mergers.

Keywords: Municipal merger; Common pool problem; Free ride (search for similar items in EconPapers)
JEL-codes: H72 H77 H83 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2019-02
New Economics Papers: this item is included in nep-pbe
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