Modeling Fiscal Stress and Contracting Out in Local Government: The Influence of Time, Financial Condition, and the Great Recession

Abstract

Various studies have analyzed the relationship between fiscal stress and contracting out, but have failed to achieve conclusive results. In this article, we take a broad view of fiscal stress, addressed in terms of financial condition and studied over a lengthy period (2000-2010). The relationship between fiscal stress and contracting out is studied using a dynamic model, based on survival analysis, a methodology that enables us to take into account the effect of time on this relationship. As this study period includes the years of the Great Recession (2008-2010), we also highlight the impact of this event on the fiscal stress-contracting out relation. The results obtained suggest that taking into account the passage of time and conducting a long-term assessment of financial condition enable a more precise understanding of this relation. We also find that the Great Recession reduced the probability of local governments' contracting out public services.

Cost efficiency and financial situation of local governments in the Canary Isles during the recession

“…In contrast, other studies have reported finding a relationship between political fragmentation and cost efficiency (Vanden Eeckaut et al, 1993;Balaguer-Coll et al, 2007;Borge et al, 2008). According to Kalb et al (2012), this relationship would be explained by the political control exerted over government partners giving rise to more efficient management.…”

“…According to Sung (2007) and Pérez-López et al (2015), a higher rate of unemployment is associated with lower cost efficiency, since as the number of jobless persons increases, fewer resources will be available to maintain public services, and if the same quantity and level of services are to be provided, this could lead to cost inefficiency. On the other hand, Kalb et al (2012) affirm that a higher unemployment rate will improve efficiency by reducing pressure on the quality of public services, thus resulting in lower costs for the municipality.…”

“…The studies carried out to determine how the ideology of the governing party (i.e., the political condition) affects municipal cost efficiency have produced conflicting results (Vanden Eeckaut et al, 1993;Benito & Bastida, 2004;Bastida et al, 2009;Kalb et al, 2012). In some cases, governments with a conservative majority have been found to achieve greater cost efficiency (Borge et al, 2008;Kalb et al, 2012;Da Cruz & Marques, 2014), but in others government by progressive parties has been associated with higher levels of municipal cost efficiency (De Borger et al, 1994;Benito et al, 2010;Geys et al, 2010).…”

“…The recent economic and financial crisis forced local governments to seek a more efficient allocation of their resources, due to the need to provide the same level of services with increasingly limited means (López-Hernández et al, 2012). Among other causes, this situation of scarce resources has arisen from falling public administration revenues, the increased competences acquired in recent years (Balaguer-Coll, 2004), greater demand for public services and the enactment of legislation 1 strengthening economicfinancial control over local entities (as indicated in the preamble to Act 27/2013, of 27 December, on the Rationalisation and Sustainability of Local Administration).…”

“…In view of these considerations, one of the main objectives of our paper is to analyse the different characteristics of borrowing and their relationship with cost efficiency, an area that we believe has been insufficiently addressed in previous research, with special emphasis on the detailed analysis of different types of borrowing, distinguishing between short and long-term borrowing, and commercial and non-commercial borrowing, seeking to determine whether their particular characteristics influence municipal cost efficiency, especially in municipalities dependent on tourism and taking into account the impact of the Great Recession (the most recent transboundary crisis) on levels of municipal efficiency and financial condition (Ansell et al, 2010;López-Hernández et al, 2017;Plata-Diaz et al, 2017). In relation to this study goal, we propose a series of hypotheses on which to base our analysis of the impact made by certain economic, financial and political factors on cost efficiency.…”