In Search of an Optimal Size for Local Government: An Assessment of Economies of Scale in Local Government in Croatia

Keywords

local public expenditures, local government, economies of scale, territorial fragmentation, Croatia

Summary

Local units perform many important functions in a society. Since their fiscal capacities
are often constrained, they should operate efficiently. This paper gives an empirical
assessment of the efficiency of local units in Croatia through an analysis of economies
of scale. Using cross-section OLS models, we found a statistically significant U-shaped
relationship between local per capita expenditures and population size, while controlling
for various demographic, socio-economic and institutional factors. The choice of
control variables in the paper is based on the existing empirical literature but also
includes factors capturing the specifics of the Croatian economy and local government
institutional setup. Using estimated regression coefficients we calculated the optimal
size of local units and showed that population size is below optimal in 72% of cities and
76% of municipalities (based on median results). In the most conservative case (lower
band of the confidence interval), these numbers fall to a still relatively high 30% of
local units below the optimal size. However, these results should be interpreted with a
grain of salt due to the high level of uncertainty that surrounds the methodology for the
calculation of the optimal size of local governments.