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The efficiency of local government: The role of privatization and public sector unions

Author

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  • Jerch, Rhiannon
  • Kahn, Matthew E.
  • Li, Shanjun

Abstract

Local governments spend roughly $1.6trillionperyear to provide a variety of public services ranging from police and fire protection to public schools and public transit. However, we know little about public sector's productivity in delivering key services. Public bus service represents a standardized output for benchmarking the cost of local government service provision. Among the top twenty largest cities, there exists significant dispersion in the operating cost per bus mile with the highest being more than three times as high as the lowest. Using a regression discontinuity design, we estimate the cost savings from privatization and explore the political economy of why privatization rates are lower in high cost unionized areas. Our analysis suggests that fully privatizing all bus transit would generate cost savings of approximately $5.7billion, or 30% of total U.S. bus transit operating expenses. The corresponding increased use of public transit from this cost reduction would lead to a gain in social welfare of $524million, at minimum, and at least 26,000 additional transit jobs.

Suggested Citation

  • Jerch, Rhiannon & Kahn, Matthew E. & Li, Shanjun, 2017. "The efficiency of local government: The role of privatization and public sector unions," Journal of Public Economics, Elsevier, vol. 154(C), pages 95-121.
  • Handle: RePEc:eee:pubeco:v:154:y:2017:i:c:p:95-121
    DOI: 10.1016/j.jpubeco.2017.08.003
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Quick Summary of My Published Work in 2017
      by Matthew Kahn in Environmental and Urban Economics on 2017-12-20 19:39:00
    2. Public Sector Pensions Crowd Out Public Sector Investment in Capital and New Workers
      by Matthew Kahn in Environmental and Urban Economics on 2018-04-15 16:54:00

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    More about this item

    Keywords

    Government service; Efficiency; Privatization; Union;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • J4 - Labor and Demographic Economics - - Particular Labor Markets

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