DYNAMIC-RESPONSES TO CHANGING DEMAND - A MODEL OF THE REALLOCATION PROCESS IN SMALL AND LARGE MUNICIPALITIES IN NORWAY

Local government priorities between local services are analysed in a community preference model emphasizing income effects and demographic factors. The model is built into a partial adjustment framework with endogenous speed of adjustment to study the dynamic responses of local governments to shifting demand. The empirical analysis of the reallocation process separates between small and large municipalities in terms of population size. Serious sluggishness of the adjustment is documented, with large municipalities experiencing stronger inertia documented, with large municipalities experiencing stronger inertia than the small. The small authorities have been able to respond more effectively to the restructuring pressure from demographic shift.