A Longitudinal Parametric Approach to Estimate Local Government Efficiency

Previous empirical works on municipal efficiency have mostly used cross-sectional data which makes it impossible to separate unobserved heterogeneity from inefficiency. Furthermore, they have also typically used a two stages approach which has been widely criticized as the assumptions made in the first stage are violated in the second stage, generating biased results. We present one of the first longitudinal parametric studies that analyze municipal efficiency and its determinants using a one step procedure. Furthermore, we are the first of this kind that analize overall efficiency as well as efficiency by clusters of municipalities in order to reduce heterogeneity. We use administrative datasets of Chilean municipalities for the 2008-2010 period and our results suggest that Chilean municipalities have on average an inefficiency level of 30% with a significant variance between clusters of municipalities. Also, our results suggest that socio-economic, fiscal and political variables affect municipal efficiency. In particular, we found that municipalities with tighter budget constraints are associated with more efficient municipalities.