The trade-off between cost efficiency and public service quality: a non parametric frontier analysis of Italian major municipalities

This paper presents the results of an empirical study aimed at evaluating the cost efficiency of 108 Italian major municipalities, and investigating to what extent the municipality efficiency is also associated to the effectiveness of public expenditure, and consequently to quality of services offered to citizens. The study implements Data Envelopment Analysis to calculate the efficiency score and understand if it is influenced by scale economies and determine the type of these economies. For this purpose, every municipality was modeled as a production function using 6 cost item inputs and 2 outputs. Finally, the study implemented a truncated regression equation using the bootstrapped efficiency estimate as the dependent variable, and a selection of indicators measuring the quality of public services offered in the context as the independent variables. Results reveal that there exist important scale-inefficiencies in a number of municipalities, but unexpectedly a great amount of inefficiencies are caused by decreasing returns to scale. Additionally, the study suggests that a trade-off between expenditure efficiency and effectiveness, i.e. the quality of public service, seems to exist.