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Does intermunicipal cooperation create inefficiency? A comparison of interest rates paid by intermunicipal organizations, amalgamated municipalities and not recently amalgamated municipalities

Maarten Allers, Bernard van Ommeren and Bieuwe Geertsema
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Bieuwe Geertsema: Groningen University

No 15003-EEF, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: In many countries, local governments operating on a small scale face a choice between amalgamation and cooperation. This paper applies a novel methodology to investigate the implications of this choice for operating efficiency. Using a unique micro-level dataset of over 11,000 loans made to both municipalities and intermunicipal organizations in the Netherlands, we show that the latter consistently pay higher interest rates than the former. That is remarkable, because credit risk is zero in both cases, and we control for loan characteristics like amortization and maturity. In contrast, municipal amalgamation does not result in higher interest rates. Possible legal or administrative costs associated with enforcing loan guarantees cannot explain the higher interest paid by intermunicipal organizations. That is because we find that public companies (which may default) do not pay higher interest rates than public bodies (which never default). Surprisingly, the number of partners cooperating in an intermunicipal organization does not affect interest rates. Thus, we find no evidence for the

Date: 2015
New Economics Papers: this item is included in nep-eff and nep-eur
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