Intermunicipal cooperation, municipal amalgamation and the price of credit

In many countries, local government size is increasingly thought to be insufficientto operate efficiently. Two possible solutions to this problem are amalgamationand intermunicipal cooperation. This paper applies a novelmethodology to shed light on the efficiency implications of this choice.Using a unique and rich micro-level dataset, we find that intermunicipalorganisations (IOs) in the Netherlands consistently pay higher interest ratesthan municipalities, while there is no economic reason to do so. We interpretthis as a form of inefficiency. Municipal amalgamation, on the other hand,does not result in higher interest rates. Our analysis eliminates one possibleexplanation, dispersed ownership of IOs, as the number of partners cooperatingin an IO does not affect interest rates (no ‘law of 1/n’). This leaves theintroduction of extra hierarchical layers as a result of cooperation, and theensuing reduction in monitoring, as the most probable explanation