Keywords

local public expenditures, local government, economies of scale, territorial fragmentation, Croatia

Local units perform many important functions in a society. Since their fiscal capacities are often constrained, they should operate efficiently. This paper gives an empirical assessment of the efficiency of local units in Croatia through an analysis of economies of scale. Using cross-section OLS models, we found a statistically significant U-shaped relationship between local per capita expenditures and population size, while controlling for various demographic, socio-economic and institutional factors. The choice of control variables in the paper is based on the existing empirical literature but also includes factors capturing the specifics of the Croatian economy and local government institutional setup. Using estimated regression coefficients we calculated the optimal size of local units and showed that population size is below optimal in 72% of cities and 76% of municipalities (based on median results). In the most conservative case (lower band of the confidence interval), these numbers fall to a still relatively high 30% of local units below the optimal size. However, these results should be interpreted with a grain of salt due to the high level of uncertainty that surrounds the methodology for the calculation of the optimal size of local governments.