Local governments' efficiency and its heterogeneity - empirical evidence from a stochastic frontier analysis of Italian municipalities 2010-2018

This paper investigates the efficiency of Italian local governments using Stochastic Frontier Analysis for the years 2010-2018. As a dependent variable of the cost function, we consider the total current expenditure for producing six 'essential' local public services: education (ancillary services), waste management, general administration, local police, public roads and planning, and social services. As outputs, we employ indicators for each of the six services in the multi-output cost function. In an alternative model specification, we use a composite indicator for the total output volume. Thus, we estimate a global efficiency score for each local government, for each year. The findings reveal that the total expenditure declined over time, more than proportionally than the contraction of output produced. Therefore, the global efficiency of Italian municipalities is estimated to be higher in 2018 than it was in 2010. Moreover, there is evidence of substantial scale economies and congestion effects, with municipalities with around 10,000 inhabitants being more efficient than their smaller and larger counterparts. Lastly, on average, local governments are more efficient in providing public services in the Northern regions than in the Southern ones, although efficiency does not decline monotonically moving South.