A Methodology for Evaluating the Cost-Effectiveness of Alternative Management Tools in Public-Sector Institutions: Application to Public Education

Abstract

This study introduces a methodology for evaluating the cost-effectiveness of alternative management tools in public institutions with an application to public education. The shift towards performance budgeting and outcome measures for public-sector institutions in recent decades creates a need to formally link inputs consumed and outcomes achieved. Given the inherent problems of cost accounting systems in public-sector institutions, we propose a statistical approach to identifying the most cost-effective management tools. Our basic approach proposes the estimation of both an outcome function and a cost function and relating the two coefficients from the regressions to determine the most cost-effective choice of management tools. As an empirical demonstration of the method, we apply both ordinary least squares and two-stage least squares to estimate such outcome and cost functions for public schools in New Jersey. Overall, the empirical results suggest that the methodology proposed has the potential to contribute to the improved management of public institutions.