Public school consolidation: a partial observability spatial bivariate probit approach

Summary A pair of municipalities may consolidate services if they are contiguous. Traditional estimation methods assume that each voting process is independent. Instead we propose a new estimation procedure that allows the probability of consolidation to be influenced by neighbouring decisions. We extend a model of local interaction by allowing consolidation effort of neighbours to be either strategic substitutes or strategic complements. We disentangle direct effects arising from a change in one's own characteristics from indirect or spillover effects associated with a change in the other municipalities’ characteristics. Results reveal that the endogenous peer effect coming from neighbours is a primary determinant of willingness to consolidate.