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The Structure of State and Local Government Production

Static and dynamic translog cost models for the aggregate U.S. state and local government sector are estimated for 1952 to 1985. Inputs are capital, labor, and a combined nondurable goods and other services input, which includes "privatized" services. Estimates show that capital and labor are complements and own-price inelastic. The nondurable-service input is a substitute for both labor and capital and has an own-price elasticity closer to unity. It is used relatively more as the sector expands. The results offer an explanation for the characterization of the government as a low productivity industry and show an economic rather than political motivation for the privatization of some public services.