Discussion Paper No.1202

Title: Asymmetric local government consolidations with heterogeneous local public goods
Authors: Akiyoshi Furukawa

Abstract: This paper analyzes the consolidation of a city and village. Inhabitants of a village benefit from the city without bearing the city's tax burden. Therefore, a village is likely to oppose municipal consolidation because they want a free ride. Conversely, a city favors consolidation because a village shares the cost of services provided by the city after consolidation. This paper analyzes that merger. From the social welfare point of view, it analyzes whether or not consolidation is desirable.
The result depends on the commuting cost between districts. On the one hand, when the commuting cost is very high, consolidation is socially undesirable and is not realized. On the other, when that cost is very low, consolidation is socially desirable and is realized. Moreover, there exists a range of commuting costs within which a village opposes consolidation that is socially desirable. That range increases as the fixed cost of public goods in the city increases, while the population in the village decreases, and the city population increases. In that case, the national government should encourage consolidation via a redistribution policy.

JEL classification: D71, H41, H73, R53
Keywords: Consolidation; Local public goods; Asymmetric district