Efficiency and returns-to-scale of local governments

Local governments of advanced countries often have financial problems. Most central governments promote re-organization of local governments into larger local governments in order to reduce operating costs. Although cost reductions have been discussed by governments, political parties, economic institutes, etc, changes in industrial efficiency in regions governed by local governments have been overlooked. In this paper, we evaluate the industrial efficiency and the corresponding returns to scale (RTS). We present input–output tables that provide data of regional economies, network data envelopment analysis algorithms to measure the industrial efficiency, and an algorithm to measure the RTS. The Japanese government has proposed plans to merge prefectures, which are equivalent to counties in Britain, into larger states. The results obtained by applying the proposed algorithm to these plans demonstrate that a number of the new states will suffer from decreased RTS and will experience reduced efficiency.