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Abstract |
In a recent study, Hayes and Millar (1990) presented empirical evidence on the cost function and apparent cost-optimizing behavior of the local managers of 33 county jails in Tennessee. Two main arguments were advanced: (1) line-item budgeting (LIB) was an ineffective control because the cost shares are assumed fixed in such budgetary settings, and (2) the budgetary control and performance evaluation process in not-for-profit settings could be improved if the underlying cost function was estimated by using a flexible functional form such as the translog to gain knowledge of possible input substitution and output transformation. This translog budget model was viewed implicitly as a superior alternative to the more traditional LIB approach. The main objective of this study is to extend Hayes and Millar’s idea of a translog budget model by outlining a more complete budgetary system. It is shown that a frontier cost function generated from the ordinary least squares (OLS) translog function can be used to identify four types of inefficiencies: the degree of technical, allocative, and scale inefficiency as well as institutional X-inefficiency (Liebenstein 1966). These four types of inefficiencies are then linked to both the long-term and short-term objectives of budgeting; namely, performance evaluation, subordinate manager motivation, planning, and control. The second objective of the study is to compare the translog budget model (as revised) against the most frequently applied alternative technique, the nonparametric data envelopment analysis (DEA), in the same context. From the standpoint of a routine budgetary control system, it was found that the DEA model is more suitable than the translog model. In not-for-profit settings, however, an econometric model such as the translog may be needed initially in the specification of the most appropriate input and output measures. Although the effectiveness of LIB as a control is not addressed directly, our analysis shows that the line-item data mandatory with this approach is an essential part of any effective budgetary system designed for a not-for-profit setting. |
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