Local government spending efficiency and fiscal decentralization: evidence from Italian municipalities

ABSTRACT

This article investigates the association between fiscal decentralization and municipality efficiency by conducting an empirical analysis focused on the Italian context. We conduct a cost-efficiency analysis based on a stochastic frontier approach with municipality and time fixed effects modelling the decentralization effect with a continuous variable, taxation autonomy, which allows for accounting for the degree and evolution of fiscal decentralization over time. The empirical analysis provides convincing evidence that fiscal decentralization is positively associated with municipalities’ efficiency. The positive effect is confirmed when additional controls are included into the model and persists to robustness checks. This evidence lends support for policies aimed at making more closely aligned expenditure and revenue decision-making.

KEYWORDS:

• Fiscal decentralization
• local governance
• Italian municipalities
• efficiency
• stochastic frontier analysis

JEL CLASSIFICATION:

• D61
• H50
• H77

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Municipalities’ expenditure and output data have been provided by SOSE, were used under licence for the current study, and, consequently, are not publicly available.

Notes

¹ See, for example, the studies by Bordignon and Turati (2009), Francese et al. (2014), Piacenza and Turati (2014) focused on the efficiency of health policy of Italian municipalities.

² Two additional pillars supporting Italian municipalities’ tax system are represented by TASI, tribute for indivisible services, applied to the possession, in any legal form, of buildings, and TARI, the waste tax, related to the cost of the waste management service, as it must ensure full cost coverage.

³ Among the different parametric functional forms, the translog function is the most commonly used in the empirical applications and it represents a generalization of the Cobb-Douglas function, which assumes homogeneity, unitary elasticity of substitution between inputs and separability.

⁴ The analyses were carried out in the $R$ Environment (R Core Team 2020). For a review of stochastic frontier models using $R$ see Ferrara (2020).

⁵ Italy is divided into 15 ordinary statute regions (OSRs) and 5 at special statute (SSRs), mainly differing in financing. We focus exclusively on OSRs, limiting the potential bias related to the different organization that such regions can self-regulate independently (Braga and Scervini 2017).

⁶ Municipalities’ expenditure and output data are provided by the database OpenCivitas, an initiative promoted by the Ministry of Economy and Finance and SOSE. The project born with Law 42/2009 and Legislative Decree 216/2010 with the aim to define for Italian municipalities the standard expenditure needs, in relation to territorial features and socio-demographic characteristics of the resident population. Such values, used to distribute intergovernmental funds in an equitable and transparent way, are collected through a detailed questionnaire for municipalities in different waves: 2010, 2013, 2015, and 2016, our years of analysis.

⁷ The weights have been obtained through the Benefit of the Doubt (BoD) approach (Charnes et al. 1978).

⁸ See footnote 8.

⁹ For territory function 8 micro-outputs have been used: environmental ordinances, authorizations conceded, reports faced, opinions of environmental compatibility, competitive bidding procedures and direct commitments, pruned plants during the year, new trees planted, clean of rivers and streams. The micro-outputs used for viability are 9: projects, operations management, progress status and final status, trials, competitive bidding procedures and direct commitments, contracts, salt interventions and snowplough, concessions of public land for construction or archaeological site, disabled parking and accesses for traffic-restricted zone allowed or renewed during the year.

¹⁰ The potential spatial heterogeneity in prices is mitigated by the presence of a public company (Consip Spa) which centralizes public procurement in Italy.

¹¹ In our sample, the total expenditure for essential services is 683 euros per capita on average in 2016, while the total public expenditure accounts for about 14.000 euros per capita, and the GDP per capita is about 26.000 euros in the same year (Eurostat 2022).

¹² Introduced in 2012, the IMU affects the ownership or possession of real estate units.