Measuring the Economic Efficiency of Producing Rural Road Services

Abstract

The research reported here examines the ability of a sample of Midwest township officials to produce low-volume rural road services in an economically efficient manner. Farrell-type measures of input use and scale efficiency are reported. Results suggest that over 50% of costs may be unnecessarily incurred because of input use inefficiency. Correlation between output measures and the efficiency measures suggests that larger jurisdictions are more efficient than smaller jurisdictions. In addition, 84.5% of the townships exhibit technology characterized by increasing returns to scale. These results suggest that jurisdictional consolidation of production-related responsibilities may yield substantial cost savings.The efficient allocation of resources by local government remains an important issue, especially given the small scale of operation inherent to many rural governments. At issue is the ability of local public officials to control costs in the face of shrinking revenue sources. The research reported in this article provides some empirical evidence on the economic efficiency of a sample of small rural governments in the Midwest (illinois, Minnesota, and Wisconsin) vested with rural road responsibilities.' Farrell-type measures of efficiency are computed for managerial and scale efficiency in order to test the ability of local public officials to provide rural road services in a least cost fashion.The paper contains six sections. The first section describes managerial and scale efficiency within a public setting. The concepts of efficiency reference sets and efficiency measurement are then discussed.

Managerial efficiency in local government: Implications on jurisdictional consolidation

“…Such a framework is not only consistent with the size economies literature (i.e., long-run average cost curves) but also conforms to the Inman (1979) two-step decision making process (Deller and Nelson, 1991). In particular, the first step of the process corresponds to provisionary decisions (demand or public choice) while the second step refers to production related decisions.…”

“…There are, however, a small handful of empirical studies which do indicate the presence of managerial inefficiencies in local governments. In a study of rural road services in the Midwest, Deller and Nelson (1991) found that of the 446 townships studied, less than one percent were identified as managerially efficient. A consistent pattern identified by Deller and Nelson confirms the hypothesis concerning the relatively higher levels of inefficiency at the smallest levels of local government.…”

“…Coupled with the high rates of turnover amongst local officials, the ability of local public officials to use inputs into the production process in a costminimizing manner is questionable (Cigler, 1987;Reid and Sullivan, 1986). Particular concern has been expressed over the ability of the smallest of local governments to effectively perform functions (Deller and Nelson, 1991;Seroka, 1981 and1990). Smaller local governments often lack the resources to attract trained professionals.…”

What Determines Local Governments' Technical Efficiency? The Case of Road Maintenance

“…Both studies identify substantial size inefficiencies and conclude that cost reductions could be realised by restructuring the production of rural roads. Deller and Nelson (1991), Deller et al (1992), Deller (1992) and Deller and Halstead (1994), on the other hand, investigate the technical efficiency of rural road maintenance using different parametric and non-parametric estimation techniques. Their estimation results suggest that road maintenance costs are 14 to 50 percent higher than necessary due to production inefficiencies.…”

Determinants of technical efficiency among cash-crop producers: Evidence from East Malaysia

“…Efficiency index derived from the equation (1.3) can be used as a measure of the performance of farmers. Based on previous studies, the influence of efficiency of farmers by Ordinary Least Square (OLS) has been used by [10] to identify this factor through a regression model. Since the measurement of efficiency is censored with the value between 0 and 1, hence some arguments state that the estimation of OLS is inconsistent and inefficient [11].…”