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NEW - Added December 15, 2009
» Local Governments in the Wake of Demographic Change:
Efficiency and Economies of Scale in German Municipalities ![[pdf]](../img/icon_pdf.gif){kind=icon}
By Benny Geys, Friedrich Heinemann, and Alexander Kalb
www.econstor.eu • 2007
Abstract: German municipalities are expected to suffer from (often significant) population losses in the upcoming decades. We assess these local governments’ vulnerability to the fiscal consequences of this demographic decline through two means (using a sample of 1021 municipalities in the state of Baden-Württemberg). First, we consider local government cost efficiency. This indicates that there is a substantial divergence in efficiency despite a homogeneous institutional setting, leaving at least some - mainly smaller - municipalities vulnerable to adverse demographic/financial shocks. Secondly, we estimate the elasticity of local government cost functions to population size. We find that costs rise (fall) underproportionally with population size for small municipalities, whereas this is less the case for larger municipalities. This implies that especially small municipalities are vulnerable to increasing cost pressures under declining population. The overall implication is that large German municipalities (over 10.000 inhabitants) will more easily be able to cope with the expected population decline than smaller ones, supporting a case for boundary reviews or more extensive inter-communal cooperation.
Since 2003 the German population has been in decline - even when immigration is taken into account. In fact, depending on the specific assumptions made concerning migration, fertility and mortality, the German population is predicted to shrink from the current 83 million inhabitants to roughly 69-74 million in 2050. This negative population trend is not restricted to Germany. Within the EU27, several other - mainly central and eastern European - countries are expected to see their population decrease between now and 2050. Such, sometimes drastic, falls in population size are unlikely to leave public finances unaffected. Indeed, fiscal revenues are likely to be negatively affected, if only because there are simply less residents to pay taxes. Furthermore, to the extent that the population decline in most Western countries is accompanied by increased population aging, a significant strain on government budgets is probable.
In contrast to most studies focusing on the effects of demographic change in terms of population ageing and concentrating on the effects at the country, or even global level, this paper investigates the effects of demographic change in terms of population decline at the municipal level. Thereby, this analysis proceeds in two steps (using data on local governments in the state of Baden-Württemberg). Firstly, we assess German local government efficiency in the year 2001 using a stochastic parametric frontier approach. This part of the analysis builds on the idea that one can expect more efficient governments to be better able to adequately address adverse economic, fiscal or demographic shocks. The overall level of efficiency of German local governments as well as the degree of heterogeneity therein across municipalities thus provides an indication of the likely strain of future demographic decline on municipal operations - and which municipalities might suffer harder from these adverse demographic shocks.
Read more: http://econstor.eu/bitstream/10419/24600/1/dp07036.pdf
Contact: Zentrum für Europäische Wirtschaftsforschung (ZEW), "Corporate Taxation and Public Finance"
Research Unit, L 7, 1, D-68161 Mannheim, Germany