Regional governments in the rural space: the effectiveness of dual-tier regional councils

ABSTRACT

The fiscal decentralization literature explores the efficient structure of local governments. However, little consideration has been given to the efficient structure of rural local governments. In this study we show that a dual-tier local government structure in rural areas is more efficient than the prevalent unitary structure. Specifically, we demonstrate that a regional council that incorporates many small villages is more efficient than when each village operates as an independent local government. We present a theoretical model and provide a simulation of the model using Israeli municipal data, which combines both unitary and dual-tier structures. The simulation uses the unitary small towns as the training set and the villages within regional councils as the test set. It thus calculates the cost structure of villages within regional councils based on the data of unitary small towns. The results indicate that most villages that are part of a regional council operate more efficiently than their simulated independent unitary counterparts. Based on the findings, we suggest an alternative lower level local government structure for rural communities that adds a mezzanine dual-tier structure.

KEYWORDS:

• fiscal decentralization
• rural villages
• local government structure
• local government efficiency frontier
• asymmetric federalism
• regional councils
• inter-municipal cooperation

JEL:

• H72
• R12
• R51
• R58

ACKNOWLEDGEMENTS

We appreciate the three anonymous reviewers and editors for their insightful remarks, which forced us to reconsider, helped us to polish our research and prevented mistakes. Any residual mistakes are entirely our own fault.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. See Council of European Municipalities and Regions (CEMR) for a description of the subnational government structures in Europe (www.ccre.org); and Chatry and Vincent (2019) for subnational governments in Asia, and Subnational Governments Around The World: Structure and Finance (OECD/UCLG, 2016).

2. Source: Israel Central Bureau of Statistics, ‘Statistical 173’ Land Uses in Israel, 2019, data from 2013).

3. This study concentrates on small towns and rural villages with up to 15,000 inhabitants. Studies of larger cities found economies of scale up to a certain point, after which the per resident cost increases (e.g., Benito et al., 2010; Southwick, 2012).

4. We are aware of the stochastic frontier or data envelope methods and are considering using them in subsequent research. Both require an output function. In contrast, the method developed here is based on maximizing the utility of providing public goods and comparing different government structures.

5. The ICBS financial data do not include the income of the rural villages’ local council from taxes. The Ministry of the Interior allows rural villages to levy a residence tax of up to 30% of the residential tax of the regional council, which increases their total revenue by around 4%.

6. For the ICBS Social Survey's table generator, see https://surveys.cbs.gov.il/Survey/surveyE.htm/.

7. The 95% confidence interval obtained from the Monte Carlo simulation is 49,400–72,800.

8. The socio-economic index of the villages within regional councils has only been available since 2013, and the periphery index of these villages only since 2015. Given that the periphery index depends on geographical characteristics, we used the periphery index data since 2013.