| Chapter 1: | Introduction |
to compare the local governments among states in each region. We also provide aggregate estimates and a more detailed analysis of the economies of scale for education and libraries using data from Indiana.
For our estimates of potential efficiency gains, we used data on the number of local governments in a county for the same samples of states in the Midwest, South, and Southwest. The data that we used in our analysis are available from various government sources, primarily the U.S. Census Bureau. We explain the motivation for each of these regional samples in the appropriate chapters. In the analysis that follows, we present statistical evidence that there are potential savings to be had from local government consolidation. However, whether these savings are achieved depends on human decisions and actions.
Aggregate Estimates
In chapter 4, we develop aggregate models to examine the potential savings from economies of scale and efficiency improvements. In the economies-of-scale model, we examine the relationship between the cost of local government (measured as tax rates) and the size of the government's jurisdiction. Using Indiana data, the results for the aggregate model strongly substantiated the presence of scale economies in the provision of local government services. The coefficient for population is statistically meaningful, economically consequential, and negative. This means that holding all else equal, there will be a decline in tax rates as the population rises in a county.
We found that scale economies existed in both the metropolitan statistical areas (MSAs) and non-MSA counties, but they were roughly three times as large in the smaller counties. In other words, for the smaller counties, the potential savings in scale economies to be gained from some form of consolidation are likely to be significantly greater than they are for the larger counties. This result is educational because it is exactly what economic theory predicts and earlier empirical studies have confirmed.
Across Indiana counties, roughly $200 million annually in savings may be available due to the economies of scale in local government