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Cost Efficiency of Finnish Municipalities 1994-2002. An Application of DEA and Tobit methods


  • Heikki A. Loikkanen


  • Ilkka Susiluoto



Cost efficiency of basic welfare service provision in 353 Finnish municipalities in 1994-2002 is investigated in an ongoing study. The municipal sector has a central role in the Finnish economy as a provider of welfare services. Data Envelopment Analysis (DEA), a non-parametric linear programming method is employed, calculating a best practise production frontier for the decision making units, and comparing the various DMUs with this frontier. The inputs consisted of four to ten of the most important services in health, social and educational sector. As the combined output, total real production costs of these services were used. According to the results efficiency differences were considerable between the municipalities, and a small group of a peripheral municipalities scored clearly below the others. Annual changes in cost efficiency were estimated. At the second stage, differences in the DEA efficiency scores were explained by using Tobit panel models. It was found that larger population and peripheral geographic position tend to reduce efficiency of municipal service production, while higher education level of inhabitants increases it.

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  • Heikki A. Loikkanen & Ilkka Susiluoto, 2004. "Cost Efficiency of Finnish Municipalities 1994-2002. An Application of DEA and Tobit methods," ERSA conference papers ersa04p283, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa04p283

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    References listed on IDEAS

    1. Kirjavainen, Tanja & Loikkanent, Heikki A., 1998. "Efficiency differences of finnish senior secondary schools: An application of DEA and Tobit analysis," Economics of Education Review, Elsevier, vol. 17(4), pages 377-394, October.
    2. De Borger, Bruno & Kerstens, Kristiaan, 1996. "Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA, and econometric approaches," Regional Science and Urban Economics, Elsevier, vol. 26(2), pages 145-170, April.
    3. Balaguer-Coll, Maria Teresa & Prior, Diego & Tortosa-Ausina, Emili, 2007. "On the determinants of local government performance: A two-stage nonparametric approach," European Economic Review, Elsevier, vol. 51(2), pages 425-451, February.
    4. De Borger, B & Kerstens, K. & Moesen, W. & Vanneste, J., 1994. "Explaining Differences in Productive Efficiency: An Application to Belgian Municipalities," Public Choice, Springer, vol. 80(3-4), pages 339-358, September.
    5. Kirjavainen, Tanja & Loikkanen Heikki A., 1995. "School Resources and Student Achievement: Evidence from Finnish Senior Secondary Schools," Discussion Papers 91, VATT Institute for Economic Research.
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    Cited by:

    1. Hitzschke, Stephan, 2011. "The optimal size of German cities: An efficiency analysis perspective," Darmstadt Discussion Papers in Economics 202, Darmstadt University of Technology, Department of Law and Economics.

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