Economies of scale: a multi-level perspective

Abstract

Driven by a quest for efficiency, many Western countries have witnessed merger waves across the entire breadth of their public sectors. The underlying assumption is that economies of scale exist in public service delivery; the idea that the average cost of public services decreases as the size of public organizations increases. The analysis of economies of scale in public service delivery and the related quest for the optimal size of public organizations has attracted a great deal of attention from researchers across disciplines. Nonetheless, despite its size, the literature on economies of scale in public service delivery has been characterized as inconclusive and inconsistent in many areas. As a result, it has proven difficult for researchers to provide policy makers and public managers with consistent recommendations regarding the optimal scale of public organizations and, more generally, the extent to which public services can expect to benefit from economies of scale. The analysis of economies of scale is subject to several methodological challenges. This dissertation focuses on one specific methodological concern: it departs from the observation that a troublesome factor in the analysis of economies of scale is the conceptual complexity of ’scale’. In essence, complexity here refers to the notion that there is more to the scale of public service delivery than simply the administrative size of the organizations that deliver those services. Typically, economies of scale are investigated by comparing the (average) cost of homogeneous organizations - such as hospitals, local governments or schools - to measures of size, in which the administrative, overall organization is the unit under investigation. However, large organizations may be organised into many smaller units and vice versa, or some services such as ICT may be subject to more economies of scale than others.