Local council partnerships: a theoretical approach

In order to provide local public goods, municipalities can cooperate and exploit economies of scale and scope. We present an analytical model of the costs and benefits of two such forms of cooperation: Consortia and Unions. We find that the efficiency of these two forms of cooperation depends on the number of participants, the transaction costs, and most importantly the type of local public good. In particular, the elasticity of substitution among the services pertaining to a particular public good plays a decisive role. For services with a high elasticity of substitution the Union performs better than the Consortium, and vice versa. This provides a guidance for the decision on which institution provides what public good.