Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities

Benny Geys, Friedrich Heinemann and Alexander Kalb

No 07-036, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: German municipalities are expected to suffer from (often significant) population losses in the upcoming decades. We assess these local governments? vulnerability to the fiscal consequences of this demographic decline through two means (using a sample of 1021 municipalities in the state of Baden-Württemberg). First, we consider local government cost efficiency. This indicates that there is a substantial divergence in efficiency despite a homogeneous institutional setting, leaving at least some – mainly smaller – municipalities vulnerable to adverse demographic/financial shocks. Secondly, we estimate the elasticity of local government cost functions to population size. We find that costs rise (fall) underproportionally with population size for small municipalities, whereas this is less the case for larger municipalities. This implies that especially small municipalities are vulnerable to increasing cost pressures under declining population. The overall implication is that large German municipalities (over 10.000 inhabitants) will more easily be able to cope with the expected population decline than smaller ones, supporting a case for boundary reviews or more extensive inter-communal cooperation.

Keywords: Demographic change; Efficiency; Local government performance; Stochastic frontier analysis; Economies of scale; Cost elasticity (search for similar items in EconPapers)
JEL-codes: D61 H40 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-eff, nep-geo, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:5695

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