Estimation of prefecture-level local government efficiency in China and policy implications for efficiency improvement

Abstract

This article is the first to study on prefecture-level local government efficiency in China. First part of this article is estimating the efficiency of 277 prefecture-level local governments in China with output-oriented Data Envelopment Analysis (DEA), and the second part is explaining why those local governments receive such efficiency scores and discussing about the policy implications, where censored linear regression model is utilized. As a result, 277 prefectures are estimated to only produce 83% of their possible outputs with given inputs on average when scale inefficiency factors are excluded. And mostly decreasing return to scale inefficiency approximately accounts for half of overall inefficiency. At last, we suggest that the Chinese government should invest more expenditure on the basic education (primary school to high school) and it is recommended to increase the period of compulsory education to 12 years. And decentralization is an important approach to improve local government efficiency by analyzing the performance disparity of special economic zone (SEZ) prefectures.