A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Šťastná, Lenka; Gregor, Martin Working Paper Local government efficiency: Evidence from the Czech municipalities IES Working Paper, No. 14/2011 Provided in Cooperation with: Charles University, Institute of Economic Studies (IES) Suggested Citation: Šťastná, Lenka; Gregor, Martin (2011) : Local government efficiency: Evidence from the Czech municipalities, IES Working Paper, No. 14/2011, Charles University in Prague, Institute of Economic Studies (IES), Prague This Version is available at: http://hdl.handle.net/10419/83438 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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This paper can be downloaded at: http://ies.fsv.cuni.cz Local Government Efficiency: Evidence from the Czech Municipalities Lenka Šťastná# Martin Gregor* # IES, Charles University Prague, E-mail: [email protected] Corresponding author * IES, Charles University Prague E-mail: [email protected] May 2011 Abstract: We measure cost efficiency of 202 Czech municipalities of extended scope in period 2003-2008. The study is the first application of overall efficiency measurement of the local governments in the new EU member states, and the second in post- communist countries. We measure government efficiency through established quantitative and qualitative indicators of the provision of education, cultural facilities, infrastructure and other local services. First, we employ non-parametric approach of the data envelopment analysis and adjust the efficiency scores by bootstrapping. Second, we employ the stochastic frontier analysis and control for effects of various demographic, economic, and political variables. We compare scores under our preferred specification, i.e. pseudo-translog time-variant stochastic-frontier analysis with determinants, with alternative scores. The determinants that robustly increase inefficiency are population size, distance to the regional center, share of university-educated citizens, capital expenditures, subsidies per capita, and the share of self-generated revenues. Concerning political variables, increase in party concentration and the voters' involvement increases efficiency, and local council with a lower share of left-wing representatives also tend to be more efficient. We interpret determinants both as indicators of slack, non-discretionary inputs, and unobservable outputs. The analysis is conducted also for the period 1994-1996, where political variables appear to influence inefficiency in a structurally different way. From comparison of the two periods, we obtain that small municipalities improve efficiency significantly more that large municipalities. Keywords: Public spending efficiency, Data Envelopment Analysis, Stochastic Frontier Analysis, local governments JEL: D24, H72 Acknowledgements This research was supported by a grant from the CERGE-EI Foundation under a program of the Global Development Network. All opinions expressed are those of the authors and have not been endorsed by CERGE-EI or the GDN. The article benefited from useful comments by Tom Coupé, Libor Dušek, Randall Filer, Ira Gang, and Jacek Mercik. We also thank Adam Ander and Nail Hassairi for research assistance. 1 Introduction Efficiency of local public spending is a topic of recent interest in public and urban economics. For practitioners, robust efficiency measures serve as performance benchmarks that help to discipline and improve local public management; for academic economists, the production function approach embedded in the efficiency measures allows to measure and explain the government’s bias to the production of publicly irrelevant outputs, and separate between competing explanations why the local governments increase public spending. In the last two decades, measuring efficiency in local governments became widespread particularly within individual European countries. Recent evidence is available from Belgium (Vanden Eeckaut et al. 1993; De Borger, Kerstens 1996; De Borger et al. 1994; for Flanders, see Geys, Moesen 2009a, 2009b), Finland (Loikkanen, Susiluoto 2005), Germany (Geys et al. 2010; Kalb 2010), Italy (Boetti et al. 2010), Norway (Borge et al. 2008), Portugal (Afonso, Fernandes 2006, 2008), and Spain (Arcelus et al. 2007, Balaguer-Coll et al. 2007; Gimenez, Prior 2007). Out of Europe, recent studies cover, inter alia, the large U.S. cities (Grossman et al. 1999; Moore et al. 2005), Canadian municipalities (Pollanen 2005) as well as Australian municipalities (Worthington, Dollery 2002). There are three reasons to measure efficiency of local governments rather than central governments: (i) Unlike cross-country comparisons of public sector efficiency, single-country studies feature relatively consistent statistics and suffer less from unobserved heterogeneity, hence more likely comply with the restrictive assumption of a homogenous production func- tion. (ii) Municipalities implement many “state-delegated” powers assigned by the central government, where the only room for manoeuvre is on the cost side. (iii) At the local level, policies are more means-focused than ends-focused also because of the absence of many instru- ments that address the main socio-economic (distributive) conflicts, such as income taxation, and therefore are more related to the provision of (local) public goods. We empirically asses cost efficiency of 202 municipalities of extended scope in the Czech Republic over the period 2003–2008. This period features institutional and territorial stability, unlike the reform years 2000–2002. By measuring efficiency comprehensively instead by sector- specific scores, we avoid an issue of fungibility of spending and misclassification into spending categories that is quite frequent at the local level. To our knowledge, our study is a first comprehensive local government efficiency exercise in the new EU members states, and the second in the post-communist region (cf. Hauner 2008). The analysis of determinants allows us to assess whether patterns of efficiency in municipalities of a post-communist country differ from those in the culturally and institutionally not so distant Western European countries (e.g., Belgium, Finland, or Germany); it also permits to briefly observe the evolution in performance and efficiency from 1990s to 2000s. We apply both parametric and non-parametric efficiency measurement methods, and also explain why the most refined parametric method (stochastic frontier analysis with a time- variant Pseudo-Translog specification and determinants) is, at least in our setting, preferred to the best non-parametric method (data envelopment analysis with variable returns to scale and bias corrected by bootstrapping). We end up with efficiency scores and compare with alternative methodologies. For each individual municipality, our procedure allows to iso- 1 late away separately (i) the effect of including determinants and (ii) the effect of assuming stochastic parametric versus deterministic non-parametric