Administrative Consolidation and the Cost of State Capacity

Naruki Notsu and Haruaki Hirota
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Naruki Notsu: Osaka School of International Public Policy, the University of Osaka
Haruaki Hirota: Faculty of Economics, Musashi University

No 26E009, OSIPP Discussion Paper from Osaka School of International Public Policy, Osaka University

Abstract: This paper studies how administrative consolidation affects the performance and cost of fiscal capacity. While consolidation may reduce administrative costs by exploiting scale effects, it may also disrupt the accumulated organizational resources and routines through which governments collect taxes. We examine this trade-off, focusing on Japan’s Great Heisei Municipal Mergers, a large wave of municipal consolidation in the early 2000s. Using an event-study based on a difference-in-differences design, we find that mergers reduce tax collection rates beginning in the pre-legal-merger transition period. In contrast, tax administrative costs fall only after formal consolidation, consistent with economies of scale in tax administration. We further find that tax revenue collected per unit of administrative cost increases after consolidation despite the decline in collection rates. These findings show that administrative consolidation weakens the collection margin of fiscal capacity during organizational transition, while lowering the resource cost of raising revenue enough to improve overall cost-effectiveness. The results highlight a trade-off between the operational performance and cost-effectiveness of fiscal capacity.

Keywords: Fiscal capacity; Tax administration; Administrative consolidation; Economies of scale (search for similar items in EconPapers)
JEL-codes: H11 H71 H72 (search for similar items in EconPapers)
Pages: 50pages
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:osp:wpaper:26e009

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