Estimating Local Government Efficiency using a Panel Data Parametric Approach: The Case of Chilean Municipalities

Previous empirical evidence on municipal efficiency mostly uses cross-sectional data which makes it impossible to separate unobserved heterogeneity from inefficiency. Furthermore, they also typically use a two stages approach which has been widely criticized as the assumptions in the first stage are violated in the second stage, generating biased results. We present a longitudinal parametric study that analyzes municipal efficiency and its determinants using a one step procedure. Moreover, we analize overall e¢ ciency as well as efficiency by clusters of municipalities in order to reduce heterogeneity. We use administrative datasets of Chilean municipalities for 2008-2010 period and our results suggest that Chilean municipalities have on average an inefficiency level of 32% 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.