Abstract Local government amalgamations lead to pre-merger overspending. To prevent this, higher levels of government can temporarily restrict local fiscal autonomy. However, scholars have been unable to demonstrate the effect of reform-specific regulations due to the difficulty in comparing regulated and non-regulated scenarios. Reformers consequently cannot assess the costs and benefits of regulations, resulting in cases of unrestricted overspending incentives. The article studies the effect of regulating opportunistic fiscal behavior in the context of mergers of local governments. It compares local government reforms in Norway (non-regulation) and Denmark (multiple regulations), using a Difference-in-Difference-in-Difference design to estimate the cost of non-regulation. The results show that the costs are significant. In the final year before merging, Norwegian municipalities overspent substantially in relation to both current expenditure and capital investment compared to their regulated Danish counterparts. Theoretical and practical implications are discussed, including the case for not implementing regulations of opportunistic fiscal behavior.
Askim et al. (Tue,) studied this question.