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-stage approach which has been widely criticized as the assumptions in the first stage are violated in the second stage, generating biased results. We contribute to the literature by putting forward a one stage approach with parametric models and panel data to estimate municipal efficiency of 324 Chilean municipalities for the period 2008-2018. We take into account observed and unobserved heterogeneity, incorporating them both into the frontier and jointly estimating efficiency of all the municipalities in the sample. Our results suggest that Chilean municipalities have a relevant degree of inefficiency as they could achieve the same provision of services with 53% -61% less resources, depending on the specification, and that there is large heterogeneity in their level of efficiency. Finally, we also find that municipalities with a high dependency on the Municipal Common Fund are less efficient supporting the notion oflocal governments fiscal lazinesspresent in the literature horizontal ellipsis

Automated summary

The study investigates the efficiency of 324 Chilean municipalities from 2008-2018, revealing a significant degree of inefficiency. The municipalities could provide the same level of services with 53% -61% less resources, showcasing substantial heterogeneity in efficiency levels between them. Additionally, municipalities with a high dependency on the Municipal Common Fund were found to be less efficient, supporting the concept of fiscal laziness in local governments as suggested in existing literature.