Local Governments in the Wake of Demographic Change: Evidence from German Municipalities

German municipalities are expected to suffer from intense demographic changes in the upcoming decades; not only in the form of population losses, but also through a changing demographic structure (i.e. less children and adolescents, more elderly, higher dependency ratio, and so on). We assess local governments' vulnerability to the fiscal consequences of these demographic transformations (using a sample of 1021 municipalities in the state of Baden-Württemberg) by determining the elasticity of local government cost functions to municipalities' demographic characteristics. Our findings indicate that smaller municipalities are especially vulnerable to increasing cost pressures following most of the currently predicted demographic changes. In the absence of increased higher-level government support (e.g. through the fiscal equalization scheme), these findings would support a case for boundary reviews or more extensive inter-communal cooperation. * We would like to thank Beate Jochimsen, Aron Kiss and two anonymous referees for helpful comments. Support by the " Förderkreis Wissenschaft und Praxis at the Centre for European Economic Research " is gratefully acknowledged. Ausweitung der inter-kommunalen Kooperation.