services affect community characteristics, which in turn enter as inputs into household production functions, it can be shown that efficient service provision can occur in a heterogeneous jurisdiction.

# _<u>Competition and Government Size, Service Level, and Productivity</u>_

Consolidation is expected to reduce competition between governments. There is a sizable literature exploring the relationships between the level of government competition and government performance. Research has analyzed the extent to which competition has affected the size of government, the quality of services delivered, and the efficiency with which resources are allocated. This research is reviewed in this section.

Theoretical research has suggested that competition could increase or decrease the size of government. Research, such as that of Tiebout, argues that competition between governments for tax base and residents provides a discipline that limits the size of government, so the expectation would be that more governments in an area would lead to smaller government in total. Anderson and Tollison (1988) provide an opposing argument, suggesting that governments not subject to competition will act as monopolists. As monopolists they are expected to reduce output and extract economic rents from interest groups. Interest groups will seek fewer wealth transfers from the monopolist government, which effectively reduces the cost to the taxpayers.

Taylor (2000) presents a well-organized survey of the empirical evidence on how government competition affects the size of government. She divides the size literature into two sections, size of the public sector and size of individual governments. The overall effects on public sector size are particularly valuable in the cases where consolidation is undertaken at the national or state level. However, the usefulness of this literature in decisions of amalgamation is limited to the information on how competition, in this case vertical, affects the size of government.<sup>24</sup> In this research, central or state government share of revenues is the most common measure of decentralization, and by assumption, vertical government competition.

Evidence that competition between levels of government affects government size is mixed. Studies applying cross-country data find no evidence that competition affects size.<sup>25</sup> Conversely, Grossman and West (1994) to find that government size is inversely related to the level of decentralization, use Canadian time-series data.<sup>26</sup> The opposite is found in Grossman’s 1992 analysis of Australian data.

There is some evidence that more horizontal competition between governments reduces the size of government. At the state or provincial level, studies of total government find some evidence that competition reduces the size of government when a

> 24 Results relating vertical competition to government size should be treated with care as there are additional factors, including increased accountability, that also have an effect on revenue and expenditure decisions.

> 25 Oates (1985), Hell (1991), and Anderson and Van Den Berg (1998).

> 26 Also see Marlow (1988), and Joulfaian and Marlow (1991).

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