Efficiency assessment of Portuguese municipalities using a conditional nonparametric approach

Measuring local government efficiency is a complex task that has to take into account that they usually operate in a heterogeneous context. Therefore, the estimation of relative efficiency measures of their performance needs to account for the effect of contextual and exogenous variables. This should assure that the respective measures adequately reflect the portion of inefficiency that may be attributable to local authorities. In this paper, we apply time‐dependent conditional frontier estimators to assess the performance of the 278 Portuguese mainland municipalities for the 2009–2014 period. By applying this nonparametric approach, we can avoid the strong assumptions on the specification of the estimated production function required by traditional two‐stage methods. Furthermore, we examine the effect of contextual variables and time on the shape of the frontier and the distribution of inefficiencies. The results reveal that the local reforms do not seem to have achieved the pursued objective of improving the efficiency of local government performance. However, we can observe a small improvement in the last year of the period after the amalgamation of some civil parishes, thus it seems that this specific process might have had a certain impact in the short term. Moreover, we find that the economic and demographic indicators included as contextual variables in our model play an important role as influencing the production set, although those effects do not seem to vary much over time. This evidence is corroborated after conducting a second‐stage nonparametric regression of the conditional efficiency measures over those variables.