Does municipal fiscal distress hinder inter-municipal cooperation?

Purpose: Inter-municipal cooperation (IMC) has been increasingly adopted worldwide to tackle issues of size and cost reduction in the provision of public services. Although the determinants of cooperation among municipalities have been widely investigated in the prior literature, little is known about the link between a municipality's financial health and that of the supra-municipal entity formed under IMC. The purpose of this study is to fill this research gap by analyzing the case of municipal unions (MUs) in Italy. Design/methodology/approach: A quantitative approach has been used, applying OLS and quantile regression on financial information and other variables of municipalities and their MUs. Findings: The study finds that the most important condition of operation for IMC, that is, financial sustainability, is directly linked to the financial health of member municipalities and the functional integration reached with the supra-municipal entity. Originality/value: The study analyses all MUs in Italy, focusing on the factors affecting their financial sustainability. In doing so, it sheds light on the factors that influence the financial sustainability of second-tier governments, which rely on external funding.