National versus Local Production: Finding the Balance between Fiscal Federalism and Economies of Scale

Public finance and public choice economists have contrasting views on the determinants of public sector size. This article makes a unique contribution to this literature by exploring an integer count of output, rather than the commonly used dollar approximation of output, using data that are homogeneous across the levels of government, where a unit of observation is not a governing body, but rather a service provider. Specifically, this article explores the counteracting effects of fiscal federalism and economies of scale using data from the National Institute of Justice with an application of data envelopment analysis and stochastic frontier analysis. I determine that provision of forensic science services at the national level rather than local level does not lead to higher relative cost, and national production may be relatively more efficient. In general, however, neither locally nor nationally operated laboratories are operating at an efficient scale, a potential argument for privatization, insourcing, or outsourcing.