Local government efficiency: determinants and spatial interdependence

ABSTRACT

We analyse the determinants of local government efficiency taking into account the presence of spatial interactions among neighbouring municipalities. To do so, first we estimate an efficiency index using the robust order-m methodology in Valencian municipalities (Spain). Second, we examine the socio-economic, political and budgetary factors that might influence efficiency levels. Finally, we analyse the spatial interactions present in our data. The results of estimating a spatial autoregressive model show that government efficiency in neighbouring municipalities positively affects the local government’s own efficiency. This highlights the importance of considering spatial dependence structures in studies on efficiency in the public sector.

KEYWORDS:

• Local governments
• efficiency
• order-m
• determinants
• spatial interdependence
• Valencian municipalities

JEL CLASSIFICATION:

• C14
• C21
• H21
• R12

Acknowledgement

We are grateful to two anonymous reviewers for their valuable recommendations. Maria Teresa Balaguer-Coll acknowledges the financial support of the Spanish Ministry of Economy (ECO2017-85746-P; ECO2017-88241-R) and of the Universitat Jaume I (17I394-UJI-B2017-14). Laura Márquez-Ramos acknowledges the support and collaboration of Generalitat Valenciana (PROMETEOII/2014/053). Diego Prior acknowledges the financial support of the Spanish Ministry of Economy (ECO2017-88241-R).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Ley 27/2013, de 27 de diciembre, de Racionalización y Sostenibilidad de la Administración Local (BOE-A-2013–13756).

² Cruz and Marques (2014) provide an extensive literature review with reference to the determinants of performance.

³ According to data from December 2011.

⁴ In the present study, local governments are the DMU.

⁵ This survey has been used in previous related research (Balaguer-Coll, Prior, and Tortosa-Ausina 2007, 2013; Benito, Solana, and Moreno 2014; Giménez and Prior 2007; Zafra-Gómez and Muñiz Perez 2010).

⁶ The information in the EIEL is prepared in accordance with the requirements of the harmonised methodology defined by the Ministry of Public Administrations. The acquisition and processing of data are carried out by technicians and experts, where there is strict control over the veracity of the data from each municipality so the EIEL reaches the required quality and fulfils the set objectives.

⁷ Law 7/1985 on the Foundations of the Local Government System (Ley Reguladora de las Bases del Régimen Local), article 26.

⁸ Despite the possible controversy surrounding the use of number of inhabitants as an output of local production, it should be noted that it has been widely accepted in the literature, basically due to the lack of data on local services (Balaguer-Coll, Prior, and Tortosa-Ausina 2013; De Borger and Kerstens 1996).

⁹ When we applied the proposal set out by Banker and Morey (1986), which involves breaking down the quality variable into two categorical variables, similar results were obtained.

¹⁰ As we are working with the inverse of the Farrell-Debreu efficiency coefficient, positive signs of the estimated coefficients indicate higher inefficiency and negative signs higher efficiency.

¹¹ Results are not displayed since they were similar to those using the threshold of 20 km.

¹² Note that failure to include enough controls (or the right controls) in the right-hand side of the model is source of bias (see, e.g. Wooldridge 2009; Angrist and Pischke 2015). In the context of our research, an omitted variable bias (OVB) might exist if the spatial lag should be included in the model but is omitted in the OLS estimation.

¹³ Our results reveal a spatial pattern when analysing the determinants of efficiency and the convenience of using a spatial lag model. To avoid a potential OVB, the SAR specification is preferred.

¹⁴ In this paper, we have not taken into account the possible coalitions between political parties due to lack of information.