Purpose: The present study explores the asymmetric cost behavior in Greek local governments. More precisely, we investigate whether municipality costs show stickiness or anti-stickiness behavior after increases or decreases in the stream of their revenues.
Design/Methodology/Approach: We adapt Anderson et al.'s (2003) approach to the public sector environment by using types of expenses and revenues typical to the local government setting. The data sample consists of 1,852 firm-year observations of Greek municipalities for the period 2002-2008.
Findings: Our empirical evidence suggests that local government managers adjust resources related to administrative services faster when revenues decrease than when they rise (anti-stickiness cost behavior). On the contrary, local government administrators adjust costs of service provision which are associated with core activities asymmetrically; more quickly for upward than for downward activity changes (cost-stickiness behaviour).
Research Implications: While prior studies examine the sticky cost phenomenon in the private sector our study explores this phenomenon in the public sector through a data-sample of municipalities. Local governments constitute an appealing and unique setting for the examination of asymmetric cost behaviour due to the existence of a strong political influence, which appears to affect rational economic decision-making, and its non-profit character, which prevents them from acting in a business-like manner.
Practical Implications: Understanding how cost stickiness works inside local governments, could lead to an understanding of its implications in periods of cutback measures. Decreases in municipalities' subsidies and grants as a result of cutbacks in central government expenditures should not be expected to automatically result into symmetric savings in expenditures as corresponding increases in expenditures when revenues used to grow. At the same time, it might be difficult to achieve balanced budgets in municipalities when there is a considerable decrease in revenues, without having to make considerable adjustments to the output and mix of services offered by them.
Originatity/Value: This study contributes to accounting literature by expanding our understanding of how deliberate decisions influence the asymmetric cost behavior in the public sector setting and especially that of local governments, to different cost categories (administrative expenses and cost of service provision) and to different revenue categories (grant receipts and tax revenues).