Summary:
– The trade-off at the heart of territorial reform is between economies of scale and proximity to citizens. In particular, we must ensure that citizens’ preferences are homogeneous. These are determined by wealth, but not exclusively; other factors, such as culture, may also come into play.
– This trade-off is made all the more difficult by the fact that individuals can move and therefore select the local government (city, region, etc.) that suits them best. This can have significant consequences in terms of efficiency and social justice.
– Other problems can undermine the effectiveness of territorial reforms. During the merger/abolition phases, there may be concerns about an increase in the debt of certain territories, for example.
The territorial reform, the first part of which—the reduction in the number of regions—was passed by the National Assembly at the end of July 2014, has several objectives, including the administrative simplification of our territories.
To analyze this reform, we must consider the factors that determine its effectiveness. This approach therefore involves questioning the optimal number of political bodies (cities, departments, and regions). Economists refer to « localgovernment » between the state and the citizen as the provider of public services. Indeed, reducing the number of regions and abolishing general/departmental councils would result in the transfer of public service provision to a new body, either closer to or further away from the citizen.[1]. This new distance may lead to savings, for example economies of scale, but may also impact the quality of public services, for example if they lose the ability to adapt to local issues.
This article presents elements of economic theory that can structure the debate on French territorial reform. In particular, it focuses on the following question: what principles should be used to decide on territorial redistricting and whether a public service will be provided locally, by a body close to citizens (such as the municipality or inter-municipal authority) or at a higher level, the new « super-regions. »
1 – The classic trade-off between operating costs and individual preferences
Assessing the effectiveness of the reform requires understanding a trade-off: providing public services locally allows policies to be designed that are more closely aligned with residents’ preferences, but incurs additional operating costs, since each local government (each municipality, for example) must equip itself with the administration and infrastructure necessary for the public service to function. The trade-off is therefore between heterogeneity and the size of the population for which the service is produced.
Let’s take a deliberately exaggerated example. Suppose that a community is considering the type of sports facilities to build (a swimming pool or a stadium) and how many to build. It would be extremely costly to build sports complexes for each individual, so the decision must be made for a (relatively large) number of people. However, the risk of increasing dissatisfaction grows with the number of people, as some may prefer a swimming pool and others a stadium. Ultimately, the number of sports complexes (swimming pools or stadiums) will depend on the cost of an additional facility and the heterogeneity of preferences (the extent to which an individual prefers swimming to athletics and vice versa).
Alesina, Baqir, and Hoxby (2004) illustrate this logic by studying the number of school districts in the United States. They show (1) that the number of school districts corresponds to a trade-off between heterogeneity of preferences and economies of scale[2], and (2) that the heterogeneity of preferences cannot be reduced to the single dimension of income, even if this is important[3]. For example, in the United States, belonging to a community (African American, Hispanic, etc.) remains a crucial factor.
In France, at the departmental and regional levels, it is unlikely that this dimension plays a role, or that the problem has been posed directly in terms of the homogeneity of individuals’ preferences. However, the statements made by elected officials, insisting on the homogeneity of territories in order to oppose the current division, ultimately follow this logic. One example is Jean Rottner (mayor of Mulhouse), who opposes an Alsace-Lorraine region that includes Champagne-Ardenne. He stated, « A region stretching from the Paris region to the Rhine is inconsistent, incoherent, and ineffective, » and launched an online petition for « Alsace alone. » This approach, the relevance of which we do not wish to and cannot discuss, nevertheless illustrates the place of territorial homogeneity and heterogeneity (but also, implicitly, the issues and preferences of the inhabitants) in the debate on territorial reform.
2 – « Tiebout Sorting »: mobility, efficiency, and justice
In 1956, Tiebout presented a model on the efficiency of local governments. According to him, local governments are efficient[4]because individuals can « vote with their feet, » i.e., move away when they are dissatisfied with local policies.
For example, suppose there are two municipalities, A and B, which offer exactly the same public services, but municipality A manages to do so at a lower cost and therefore with a lower tax rate. An economic agent will therefore choose to live in A, and eventually, city B will decline. Tiebout’s idea is therefore that, in the long run, only efficient local governments can survive[5]. To predict the impact of territorial reform, it is crucial to take this mechanism into account. Two points should be noted before discussing the links between territorial reform and Tiebout’s mechanism.
First, Tiebout’s mechanism is not limited to cases of territorial reform. The previous example deals with two municipalities and their local policies, regardless of what is happening at the departmental or regional level. In fact, it is necessary to incorporate « Tiebout sorting » whenever we want to talk about territorial policy and individuals can « easily » change territories.
Second, the logic of Tiebout’s mechanism is very similar to that of Alesina, Baqir, and Hoxby (2004), as discussed in the previous section. Moreover, they base their work on Tiebout’s ideas. However, while Alesina, Baqir, and Hoxby explain that the number of local governments depends on the number of individuals and the homogeneity of their preferences, most analyses based on Tiebout’s insights consider the opposite possibility: individuals will migrate to other territories (the number of local governments is therefore fixed) in order to live in communities that best meet their requirements.
It is this possibility of « moving » that we must incorporate into an analysis of territorial reform. This leads us to consider two issues.
The first issue concerns a failed merger between regions. If two overly heterogeneous regions were to merge, making it impossible to provide satisfactory public goods, it would then be possible for part of the population to leave the inefficient region in order to live in the other. This « direct » interpretation of Tiebout’s mechanism is, in fact, somewhat extreme. In the short term, the probability of significant population movements between regions is low. In the medium to long term, however, it is possible that the reform will have demographic consequences and change the distribution of the French population.
A second issue would concern the redistribution of powers between the new « super-regions » and the inter-municipal communities and municipalities. In particular, to whom should the powers of the general councils be redistributed? Once again, this is a trade-off between the heterogeneity of the underlying population’s preferences and economies of scale: municipalities are closer to residents and therefore to their preferences, but greater economies of scale can be achieved at the regional level. However, to be viable, the final decision will have to take into account the possibility that residents may move away and the impact this may have on population stratification. In particular, if powers are redistributed to municipalities and inter-municipal communities, this may accentuate « Tiebout Sorting » within regions and departments.
Let’s take an example: when the general councils disappear, a number of social welfare powers will have to be reallocated.[6]. If municipalities inherit these powers, we must take into account individuals’ strategies. Between two municipalities (A and B), individuals with modest incomes may ultimately prefer to settle in the more generous municipality, for example municipality A. In turn, « rich » people will prefer to avoid municipality A, which will probably have a higher tax rate in order to finance its more generous public services. Ultimately, we may end up with a stable situation (an equilibrium) where « poor » people all live in city A and « rich » people in city B. This will have an impact on the size of cities, but above all it will change the social stratification (between rich and poor).
Far from being anecdotal, this potential population mobility can have two major consequences.
The first consequence concerns the efficiency of public service provision. Calabrese, Epple, and Romano (2009) have developed a model for studying centralized and decentralized management.[7]of public goods and services by incorporating « Tiebout Sorting. » By calibrating their model with values intended to reflect the population of the United States, they show that decentralized management is the least efficient (however, this result is dependent on a significant number of assumptions and cannot be directly applied to France). In their example, the entire population loses out as a result of decentralization.
Let’s return to our example of cities A and B. The poor are obviously the losers, as they now live without the rich, who are the primary contributors to public services. The rich may be losers for a variety of reasons. Tiebout’s mechanisms require the integration of many elements, such as the real estate market, and the stratification of the population can introduce significant inefficiencies in these different markets. The stratification between rich and poor can be either too extreme or not extreme enough, leading to new inefficiencies. Finally, we can also consider rich cities that are « too small » and do not take sufficient advantage of economies of scale to be profitable.
The second consequence is the impact in terms of social justice. The previous paragraph shows that social stratification can occur based on wealth. In short, the creation of rich communities and poor communities. Obviously, this stratification already exists, but changing the new distribution of powers between cities and regions can have a decisive impact (positive or negative) on this stratification. Furthermore, on this specific point, efficiency and justice do not necessarily go hand in hand.[8].
Redistributing the powers of general councils to « super-regions » should prove less problematic, since it is more difficult to leave a region than a municipality. This is also the message conveyed by Calabrese, Epple, and Romano (2009) in their articles on centralization: despite the gains made through « Tiebout Sorting, » decentralized management remains less efficient than centralized management.
Ultimately, it will be necessary to decide on a case-by-case basis for each power whether it is better to reallocate it to regions, intermunicipal bodies, or regions. However, the discussion on this distribution of powers must take into account:
– The trade-off between proximity—to be as close as possible to individuals and their preferences—and economies of scale.
– The mobility of individuals and its impact on efficiency: even in the absence of significant economies of scale, the regional level may be the most effective solution.
– The requirement for fairness: efficiency gains could be captured by a minority.
3 – The risk of free riding
Other issues may be added to these central problems in determining the success or failure of territorial reform. Among these issues is the free riding behavior of the entities that are going to merge.
One example is debt. A local government, anticipating a merger with another, may decide to take on much more debt because it knows that its population will only have to repay a fraction of it.
Indeed, suppose that a region with 100 inhabitants borrows €100 to finance a project that yields 0.7 per inhabitant of the region (and only for them). Under normal circumstances, each inhabitant would have to repay $1 for a gain of $0.7, and the project would not be approved. Now, suppose that this same region merges with another region that also has 100 inhabitants, and that the merger takes place before the debt is repaid. The debt will now have to be repaid by 200 inhabitants, or $0.5 per person. In the first region, the project is now profitable: the gain is still 0.7, but the cost per inhabitant is now only 0.5. The other entity is obviously the loser, since its inhabitants will have to repay 0.5 without having gained anything.
This mechanism depends on the relative size of the entities merging. If the region questioning the advisability of the project has only 50 inhabitants, and the other 150, the project becomes all the more profitable. The first region will only have to repay a quarter of its debts incurred before the merger.
Far from being anecdotal, this problem was highlighted by Hinnerich (2009) and Tuukka Saarimaa and Janne Tukiainen (2013) during municipal mergers in Finland. Cities that merged (voluntarily or otherwise) incurred more debt in the period leading up to the merger. These additional debts were all the greater when the city incurring them was small in terms of population compared to the cities involved in the merger as a whole. They anticipated that their debts would be diluted in the population of the new city and that their residents would therefore only repay a portion of them.
In the French case, this risk exists both for regions that actually merge with each other and for general councils (which disappear). They can incur debt to finance a project that only concerns one department, and this debt will be recovered by a super-region and therefore repaid by many more inhabitants. The terms under which the debts will be repaid will have a decisive influence on this free-rider behavior.
Conclusion
While French territorial reform is likely to contribute to simplifying the administrative organization of our country, its effectiveness depends on two factors: (1) the trade-off between proximity to citizens and economies of scale—a trade-off that must be made under the constraints of individual mobility and which could have consequences in terms of social justice—and (2) the free-riding behavior of territories and elected officials, particularly in terms of taxation and budget management. These threats are not the only ones, but they will have a decisive impact on the success of the reform.
Reference:
– Alberto Alesina, Reza Baqir, and Caroline Hoxby, » Political Jurisdictions in Heterogeneous Communities, » Journal of Political Economy, 2004, vol. 112, no. 2
– Stephen M. Calabrese, Dennis N. Epple, Richard E. Romano, Inefficiencies from Metropolitan Political and Fiscal Decentralization: Failures of Tiebout Competition, The Review of Economic Studies 79(3), July 2012; 1081-1111.
– Stephen M. Calabrese, Dennis N. Epple, Richard E. Romano, On the Political Economy of Zoning
Journal of Public Economics 91(1-2), February 2007; 25-49.
– JDD article on the RSA and the distribution of powers among general councils:
Notes:
[1] The « distance from citizens » will be greater or lesser depending on who inherits the powers: the city, the inter-municipal authority, or the region.
[2] Once again, these are administrative costs that do not depend on the number of students in the district and would therefore be « saved » if two districts merged.
[3] Income determines how much an individual will contribute to a public good, which leads to heterogeneity in preferences regarding the quantity, quality, and sometimes also the type of public good that they prefer.
[4] Tiebout emphasizes this efficiency. His theory is a response to Samuelson’s pessimism about the efficiency of governments in general.
[5] This mechanism is obviously based on numerous assumptions, such as low travel costs.
[6] One example is the RSA (Revenu de Solidarité Active, or Active Solidarity Income), which is currently managed by the departments. However, according to an article published in the JDD on May 11, 204, it would appear that management of the RSA is being taken over by the State. In fact, any powers transferred to the municipalities may have an impact on « Tiebout Sorting. »
[7] The policies they study are more a choice between inter-municipal or municipal management. However, the general logic remains the same between the region and the inter-municipal authority and the municipality.
[8] In another article incorporating « Tiebout Sorting, » but this time studying zoning (the set of urban planning rules governing construction on certain plots of land) and therefore not directly addressing issues of centralization and decentralization of public services, Calabrese, Epple, and Romano (2009) show that zoning can be used as a brake on mobility (particularly for the poorest). One of the interesting points of the article is that, while zoning increases overall social surplus, these gains are achieved at the expense of 75% of the population (the poorest 75%).
