Local government amalgamations and pre-merger overspending: Central naivety meets local opportunism

Amalgamation of local governments incentivizes pre-merger overspending since the costs will be transferred to the future, merged unit. The article updates the application of the common pool theory to such opportunistic pre-merger behavior. It studies Norway’s 2010s reform and paints a uniquely nuanced picture of pre-merger overspending, comparing fiscal policies before and after the reform’s enactment among merging and non-merging municipalities. It is corroborated that local governments about to merge will overspend prior to the merger. New insights are won about local governments’ differential incentives to allocate overspending to capital or current expenditure and their opportunities to act on these incentives in the final and the penultimate year before mergers are implemented. New insights are also won about the differential incentive structures of junior and senior partners to a merger. Juniors overspend the most on current expenditure, but junior and senior partners overspend equally on capital expenditure. These insights have not only theoretical value but also practical applications.