Does Persistent Cost Inefficiency Exist? A Municipal-Level Analysis of Expenditure in Victorian Local Government

While a voluminous empirical literature has investigated cost efficiency in local government, until recently no effort has been invested in decomposing municipal performance into its persistent efficiency and transient efficiency components. In this paper, we estimate persistent and transient cost efficiency that might be attributed to managerial and environmental factors in the Victorian state local government system in Australia using stochastic frontier analysis over the period from 2014/2015 to 2018/2019. In addition, we seek to contribute to the empirical literature on local government performance by estimating differences in cost efficiency between urban and rural councils and the relationship between the transient cost efficiency and the overall cost performance of Victorian local councils. We find that the overall cost efficiency (OCE) of local councils is highly correlated with transient (short term) cost efficiency and that urban councils are more cost-efficient than their rural counterparts. Various public policy implications are then considered.