Regulating against freeriding: State regulations’ effects on municipalities’ pre-merger overspending

Local government amalgamations radically changes the political, organisational and economic landscape of the involved municipalities. One major change is that an amalgamation even before the actual merger constitutes a common pool of resources that the amalgamation partners can potentially exploit. Amalgamation of local governments is an incentive for pre-merger overspending as the costs are transferred to the merged unit of the future. The paper asks how variance in reform-specific regulation of municipal fiscal behaviour affects the level and form of pre-merger overspending at the local level. The paper compares one local government reform where municipal fiscal behaviour was regulated (Denmark’s reform in the 2000s) and one without reform-specific regulations (Norway’s reform in the 2010s), in both cases comparing fiscal policies before and after enactment of the reform among merging and non-merging municipalities. In using a broad array of outcome variables, the paper paints a nuanced and complete picture of municipalities’ not only upholding but also adapting to and circumventing state regulations, so as to find ways of acting on the freeriding incentive before mergers are implemented.