What Exogenous Factors Generate Municipal Inefficiency? An Empirical Investigation of the Determinants of Input Excess in Local Government

Abstract

<p>A substantial empirical literature has investigated the performance of local authorities in a host of countries across the world. While this body of knowledge has made a significant contribution to our understanding of local government performance, including the role played by 'non-discretionary' environmental factors, much remains to be done. In an attempt to address some of the shortcomings of extant studies on the determinants of municipal performance, especially in terms of their treatment of environmental factors, in this paper we investigate the technical efficiency of local government in South Australia (SA) by examining input slacks (input excess) in the different municipal services However, in contrast to existing empirical work in the area, which is focused almost exclusively on the direct impact of determinants on efficiency scores, we examine the effects of determinants on input excess, in order to determine which factors stimulate local councils to perform inefficiently, then internalize their influence and filter out unobserved biases via a bootstrapping methodology to evaluate the managerial inefficiency of SA local government. We find that the efficiency of SA local councils is on average 0.734, implying that local councils could potentially improve their performance by 0.267 to reach the full efficiency. After filtering out the influence of environmental factors on inputs slacks and unobserved disturbances with the bootstrapping method, the residual inefficiency can be attributed to managerial inefficiency. Various policy implications are then considered.</p>