The expenditure effects of municipal annexation

Summary and conclusions

The shift in the institutional stucture in California in 1963 simultaneously reduced the ability of new cities to incorporate and elevated the status of annexation as a favored municipal growth policy. This study finds that cities which grew more rapidly by annexation also experienced more rapid expenditure growth rates than cities which did not grow rapidly by annexation. These results, using somewhat better data, corroborate those of M-W. They support the hypothesis that the institutional shift toward annexation enhanced the service monopolies enjoyed by existing municipalities thus promoting bureau-growth and inefficiency. Of course, further tests will be necessary to determine whether these expenditure effects arise solely because of annexation. That is, would this expenditure growth be expected in easy-annexation states even if entry to the local government services market were relatively open? The bureaucracy-monopoly hypothesis also needs to be tested against alternative hypotheses about the causes of rapid expenditure growth in high annexation cities. Nonetheless, the results of this study, combined with those of M-W, clearly indicate the importance of the institutional structure in affecting municipal fiscal behavior.