Optimal annexation

Previous empirical studies of the effects of annexation on municipal expenditures and municipal efficiency have yielded mixed results. Here it is argued that as municipalities grow through annexation, there may be administrative and service delivery efficiencies that, at least for a time, more than offset the inefficiencies of a heightened degree of monopoly power in the provision of infrastructure and services. If this is the case, then the rates of growth of both per capita taxes and per capita spending will decrease with annexation. Eventually, though, administrative and service inefficiencies are likely to develop as the city's geographic area and population base increase, and monopoly inefficiencies are likely to worsen. If this is the case, then the rates of growth of both per capita taxes and per capita spending will increase with annexation. Thus, there may be some level of annexation activity at which the growth of per capita taxes and the growth of per capita spending will be minimized. Municipal annexation, taxation, and expenditure outcomes from the 1970s are analysed in an empirical framework that reflects the interactions among these variables in dynamic municipal settings. The results are consistent with the existence of an optimal level of annexation.