The impact of demand factors on supply of local public services in estonian municipalities

The goal of this paper is to model the influence of demand side factors on the supply of impure local public services in Estonian municipalities in order to assess the effectiveness of supply and the necessity of its improvement. To achieve the goal we engage in the following research tasks:

• analyse qualitatively the relationships between local government expenditures on impure public services and their main demand side factors based on research literature;
• model quantitatively the impact of demand side factors of impure local public services on local government budget expenditure levels and structure in Estonian municipalities;
• comparatively analyse differences in impact direction, intensity and significance of demand side factors between different types of Estonian municipalities.

The empirical analysis will be realized on the assumption that the output decisions of political processes in municipalities, in general, reflect the average opinion of the inhabitants of municipalities about the level and structure of expenditures on impure local public services, meaning that the structure of the local government budget is formed in accordance with the preferences of the municipal population. In that case, the differences between municipalities in terms of the structure of local government expenditures on impure public services result from differences in the level, structure and dynamics of demand-setting factors. The significance, direction and intensity of the impact of potential factors on supply of local impure services can be identified using statistical relationship analysis methods (correlation analysis, principal component analysis, multiple regression analysis).

Population size and structure, as well as income levels and employment structure of the inhabitants of the municipalities are considered as demand side factors of impure local public services in this study. The supply levels and structure of these services are described through different types of budget expenditure per inhabitant or service user, but also through the shares of different expenditure types in total expenditures in Estonian municipal budgets.

The results of the empirical analysis show many statistically significant relationships between demand side factors and supply indicators, but only a small share of the differences between municipalities in terms of the level and structure of budget expenditures on impure local public services is described through multiple regression models based on the principal components of demand side factors. Consequently, the effectiveness of the supply of impure local public services is not high in Estonian municipalities.