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November 27, 2024

The optimal size of local governments

How the allocation of villages to government units in India affects the delivery of public services.

Tyler Smith

Source: MazurTravel

Local governments deliver essential public services to billions of people worldwide. Yet little is known about the optimal way to organize them. Smaller units might enable better monitoring of politicians and stronger electoral accountability, but they could also be more easily captured by local elites or miss out on economies of scale. 

In a paper in the American Economic Review, authors Veda Narasimhan and Jeffrey Weaver provide rigorous causal evidence on this question by studying over 100,000 villages in India's most populous state. They find that villages in smaller government units provide significantly better public services, including education, sanitation, and  welfare programs. 

The researchers draw their conclusions from an administrative rule in Uttar Pradesh. Villages there with populations over 1,000 are assigned their own local government, while smaller villages are grouped together into larger units. This creates a natural experiment where villages just above and below the 1,000-person threshold are nearly identical except that those just above the cutoff end up in smaller government units and those just below that cutoff get assigned to larger government units. By comparing outcomes across this threshold, the researchers measured how the size of local government units affects public service delivery.

Figure 2 from the authors’ paper displays six panels that illustrate the effects of smaller local government on various public service outcomes in villages. 

Figure 2 from Narasimhan and Weaver (2024)

The education index in Panel A combines multiple outcomes, such as the number of schools and educational attainment. Panel B shows a village-level amenities index that combines outcomes like paved roads, piped water, and community centers. The household-level amenities index in Panel C measures things like quality of housing materials, toilets, and drainage systems. Panel D plots a workfare index that indicates better implementation of employment guarantee schemes. The programs index in Panel E includes the delivery of eight different welfare programs, indicating better access to government benefits. Lastly, Panel F correlates poverty and ownership of a BPL (Below Poverty Line) ration card, pointing to more effective allocation of resources to those who need them.

Across all panels, there is a significant jump at the 1,000 population threshold, evidence of the positive impacts of smaller government units.

The findings provide guidance for the design of local governments in developing countries, where public service delivery remains a challenge. While smaller units have higher administrative costs, the benefits in terms of better service delivery appear to outweigh these costs in settings where public services are currently underprovided.