Did the merger strategy towards optimal scale go too far? The case of Swedish district courts

Abstract In Sweden, as in many other countries, the public sector has implemented merger policies to exploit economies of scale and improve efficiency. In previous work, (Agrell et al. 2020) we showed that mergers had a positive impact on efficiency. In this study, we investigate the economies of scale argument for mergers. To measure scale elasticity, we estimate a global translog stochastic frontier input distance function covering the years 2000–2016. Our results show that the merger strategy is well supported in empirical results. In the early 2000s, the majority of district courts (95%) operated under increasing returns to scale (IRS), meaning that they were too small compared to optimal scale. About 3% operated under decreasing returns to scale (DRS) and 2% operated at optimal scale. In 2016, around 30% had targeted optimal scale, but 17% were operating at DRS, indicating that they had become too large. These findings show both the potential and the limits of public-sector mergers in demand-driven services such as courts. JEL: D24, H41