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

Abstract

ABSTRACT: The shift toward performance budgeting and outcome measures for public-sector institutions in recent decades has created 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 identify the most cost-effective management tools that also recognize the endogeneity between costs and outcomes. The model developed allows for the examination of possible trade-offs that can be exercised by public-sector institutions facing multiple stakeholders with conflicting objectives. Using public schools in New Jersey and a set of variables identified from the education economics literature, we estimate cost and outcome functions to demonstrate empirically the choices made by school district superintendents that trade off the interests of various stakeholders, while seeking to meet the core objectives of the institutions. Our empirical results provide insight on the variables controllable by the superintendents that appear to be used inefficiently, or are subject to institutional constraints that limit the flexibility in input choice assumed by the proposed method. From a management accounting standpoint, the identification of such variables narrows the areas to be focused on in the search for improvements in performance.