# Output complexity, environmental conditions, and the efficiency of municipalities

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## Abstract

Over the last few years, many studies have analyzed the efficiency of local governments in different countries. An accurate definition of their output bundles—i.e., the services and facilities they provide to their constituencies—is essential to this research. However, several difficulties emerge in this task. First, since in most cases the law only establishes the minimum amount of services and facilities to provide, it may well be the case that some municipalities go beyond the legal minimum and, consequently, might have an uncertain effect on efficiency when compared to other municipalities which stick to the legal minimum. Second, municipalities face very different environmental conditions, which raises some doubts about the plausibility of an unconditional analysis. This study tackles these problems by proposing an analysis in which the efficiency of municipalities is evaluated after splitting them into clusters according to various criteria (output mix, environmental conditions, level of powers). We perform our estimations using order-*m* frontiers, given their robustness to outliers and immunity to the curse of dimensionality. We provide an application to Spanish municipalities, and results show that both output mix and, more especially, environmental conditions, should be controlled for, since efficiency differences between municipalities in different groups are notable.

## Keywords

Efficiency Environmental conditions Local government Metafrontier Order-*m*

## JEL Classification

D24 D60 H71 H72## Notes

### Acknowledgments

We are grateful for the helpful comments by Léopold Simar, Philippe Vanden Eckaut, Javier Perote, Esther del Brío, Knox Lovell, Christopher O’Donnell, Valentin Zelenyuk, Prasada Rao, Antonio Peyrache, Alicia Rambaldi and other participants at the XI European Workshop on Efficiency and Productivity Analysis (Pisa, June 2009), 49th European Congress of the Regional Science Association International (Lodz, 2009), XVII Encuentro de Economía Pública (Murcia, 2010), University of Salamanca Seminar (Salamanca, Spain), and CEPA Seminar (University of Queensland, Brisbane, December 2010), as well as those by the three referees which contributed substantially to the overall improvement of the paper. All three authors acknowledge the financial support of Ministerio de Ciencia e Innovación (ECO2010-18967/ECON and ECO2011-27227). Maria Teresa Balaguer-Coll and Emili Tortosa-Ausina also acknowledge the financial support of Fundació Caixa Castelló-Bancaixa (P1.1B2009-54) and Generalitat Valenciana (PROMETEO/2009/066), respectively. The usual disclaimer applies.

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