Common pool problems in voluntary municipal mergers

•We analyze free-riding behavior of Finnish municipalities prior to municipal mergers.•A time lag between the initial decision and the actual merger creates a common pool.•Municipalities exploit the common pool by substantially increasing municipal debt.•The results are consistent with the “law of 1/n”.

We analyze free-riding behavior of Finnish municipalities prior to voluntary municipal mergers. The merger process creates a temporary common pool problem, because of a delay from the initial decision to the actual merger during which municipalities stay autonomous. Using a difference-in-differences strategy, we find that the stronger free-riding incentive a municipality faced the more it increased its debt and spent its cash reserves. These funds were spent mostly on investments and current expenditures.