Public Sector Technical Inefficiency in Large U.S. Cities

Technical inefficiency is the extent to which production is below the maximum possible given the mix of chosen inputs. Controlling for the determinants of local property value that a local government cannot change, a city produces local property value through the expenditure and revenue choices that it makes. If a city is generating the highest attainable market value of aggregate property within its boundaries given the local fiscal choices that it has made, then it is producing local government in a technically efficient manner. In this paper, using the concept of the stochastic frontier production function, we measure technical inefficiency in the local public sector based upon a comparison of local property values. The specification introduced allows the random component associated with the presence of technical inefficiency to depend on factors that have been suggested as limiting or enhancing technical inefficiency. Using a sample of 49 U.S. central cities, we find that large city governments in the United States are operating at different degrees of technical inefficiency and the degree of technical inefficiency varies inversely with measured levels of competitive pressures.