This setting determines how far in tiles an object has to be from a town center, before it comes under the local authority jurisdiction.

You can set this value during the game, by typing the following in the console:

setting dist_local_authority X

where X is the radius (in tiles) of a town's jurisdiction.

The default value is 20.

You can set the value permanently using the following syntax in Openttd.cfg:

[patches]
dist_local_authority = X