I generally agree with you about government being not inherently trustworthy just because a town is small. However, I think small town governments are generally less bad than larger town/city governments just because of the reduced number of people represented per elected official.

I've lived in small and smallish towns in four states and pay attention to local politics because I was raised to do that.

Local culture is the dominant term in the equation by a mile. How effective and efficient government is a reflection of how effective and efficient people (some of whom make up the government) expect it to be. A "highly competent" government from New Jersey would have people talking about tar and feathers in Maine.

Within a given state it seems like government effectiveness is inversely correlated with population and wealth. The more money you have the easier it is to justify pissing some of it away on boondoggle projects. The more people you have the less accountability there is.

Another thing I've noticed is that in the smaller government states the middle class poor don't hate the state government as much because it doesn't affect them as much or as often.