61 Rethinking local government: Essays on municipal reform - VATT

Chapter 5Do voters value <strong>local</strong> representation? Strategicvoting after municipal mergers 1Tuukka SaarimaaGovernment Institute for Economic ResearchJanne TukiainenGovernment Institute for Economic Researchand Helsinki Center of Economic Research5.1 IntroductionIn most countries, the production and funding of many public servicesis decentralized to <strong>local</strong> <strong>government</strong>s or municipalities. This type ofdecentralization raises two important and often intertwined questionsthat need to be answered. The first is the question of assignment offunctions and revenue sources to different levels of <strong>government</strong>. 2According to classic arguments by Musgrave (1959) and Oates(1972), in the absence of scale benefits in the provision of a publicgood or service and interjurisdictional spillovers, decision makingshould be decentralized so that public good provision can be matchedto heterogeneous preferences of the voter population.The second question concerns the optimal size of municipalitiesonce the assignment of tasks and taxes has been settled. In theory, theoptimal size of municipalities is determined as a tradeoff of opposing1 We thank Essi Eerola, Jani-Petri Laamanen, Antti Moisio and Heikki Pursiainenfor helpful comments. We also thank seminar participants at the PEARL conference inHelsinki and at VATT for useful discussions. Oskari Harjunen provided excellent researchassistance. Janne Tukiainen is grateful to the Emil Aaltonen Foundation for financial support.2 See Oates (1999) for an overview of this literature.131