Effect of modes of public services delivery on the efficiency of local governments: A two-stage approach

•We show the effect of modes of public services delivery on local government's efficiency.•Decentralisation and externalisation impact negatively on local governments' efficiency.•Public business entities created by right-wing parties may improve the annual efficiency.•Mixed companies created by right-wing parties may increase the inter-annual variation of efficiency.

A clear relationship has not been found between the modes of public services delivery and the efficiency of local Governments. Studies have been carried out for only one or two services and/or in a concrete year, so the real effect is difficult to generalize.The main aim of this study is to analyse the effect of functional decentralisation and externalisation processes on the efficiency of local public services delivery, in order to clarify the situation. For this, 129 Spanish municipalities with populations over 10,000 between 1999 and 2007 have been considered.The results show that both pure modes of public services delivery – functional decentralisation and externalisation – impact negatively on efficiency of local governments. Nevertheless, public business entities created by right-wing parties may improve the annual efficiency of the local governments. Furthermore, mixed companies may increase the inter-annual variation of the efficiency, especially when they are promoted by right-wing governments too.