THE IMPACT OF TRANSPARENCY OF MUNICIPALITIES ON THEIR

EFFICIENCY:

THE CASE OF COLOMBIA

MYKHAILO MATVIEIEV

SERGIO ORDOÑEZ BELTRAN

1. INTRODUCTION

At the end of the eighties, most Latin American states introduced a series of administrative
reforms, which, among other things, were focused on the design and strengthening of
agreements to improve the efficiency and effectiveness of public institutions within a
decentralization framework on political and fiscal issues. In particular, the reforms were
based on the idea of closer attention to the citizens’ needs by the State, opening institutions
and establishing mechanisms of transparency and public accountability (Ramirez , 2009).
In spite of the above, today a large number of Latin American countries and, in particular,
their government institutions, are described as "non-transparent" and the growing wave of
corruption and clientelism is a centre of discussion and debate, together with its possible
consequences in the performance of administrations. For the Colombian case, Santamaría
(2010) and Mejía (2010) regret that corruption and low levels of transparency have been
institutional characteristics that the country has been suffering for several years and that has
involved serious delays and inefficiencies especially at regional and municipal level
(Santamaria, 2018) and (Mejia, 2018).

The territory of Colombia is divided into 36 Departments which are constituted by 1122
Municipalities. Municipalities are governed by the mayor who is elected by popular vote
every four years to be political authority, head of the local administration and legal
representative of the territorial entity. Additionally, there is an administrative body called
municipal council elected by popular vote. This administrative body is in charge of exercising
political control over the municipal administration.

The local governments in Colombia are highly independent in conducting their economic,
budgetary and financial policies. Since municipalities in Colombia are independent in
decision making, their activities are often subject to sharp criticism from civil society. In
order to achieve a high level of public control, a great degree of transparency of the public
resources use is required. There are standard procedures to ensure a minimum level of
transparency of local governments in Colombia. For instance, article 315 of the Political
Constitution of Colombia recognize that the mayor must report about the development of its
management; convene at least twice a year the councillors, social organizations and interested
parties to present management reports and the most important public projects; disseminate
the development plan and facilitate citizen participation in its elaboration (Constitution of
Colombia, 1991)

Despite the existence of "standard" measures to ensure clarity in the decision-making process
for all local authorities, the level of transparency among the municipalities is not uniform
across the country. Openness, transparency in the provision of information allows voters to
assess the performance of local authorities more competently, which potentially may create
pressure against wasteful activities, thereby instigating the efficiency of a local government.
This is precisely what we do in the present work: we aim at investigating the impact of
transparency of municipalities in Colombia on their efficiency.

To address the above, in the first part we will provide a theoretical and conceptual perspective
that allows us to analyse the relationship between transparency and efficiency at the local
level. We argue that the relationship between transparency and efficiency can be approached
from agency’s theory, theory of crime and an analysis of transaction costs, especially in a
context of public and local administration. In the second section we expose the method of
empirical analysis used, such as sample, indicators and other measures used and their
descriptive statistics. In the third part, we proceed with empirical analysis. We conclude with
economic discussion and conclussions.

2. TRANSPARENCY AND EFFICIENCY: LITERATURE REVIEW IN

PUBLIC AND LOCAL SECTOR.

2.1 Transparency in public sector

Transparency is a concept of Public Administration (PA) and is related to all available

mechanisms to disclose or provide government information. Transparency means that
information related with any governmental and administrative decision, as well as the costs
and resources committed to that decision and its application, are accessible, clear and
communicated to the general public (Guerrero & Hofbauer , 2003). Thus, recent literature
has affirmed that transparency is a key principle for good administration, where to bring
citizens closer to participate in decisions in the public sector, diminishing government
secrecy and disclosing information about their activities are the main goals.
According to Hood (2006), transparency is more than having access to government
information, even more important is that this published information is understandable to
interested actors (Hood C. , 2006). Legal requirements, policies and institutions play an
important role in making information available at the levels and characteristics that citizens
and external actors demand. According to Fung (2013), transparency has four important
principles: i) Availability; information on government activities and operations must be rich
for stakeholders ii) Proportionality; institutions must establish information priorities as long
as there is information of vital importance for the interests of the citizenship iii) Accessibility;
since the information must be easily accessible for those who use it and iv) Actionability;
because the democratic structure must allow the citizen to act according to the information
received (Fung, 2013).
For the purposes of this study, we will understand transparency as the disclosure of
information from the local government to the public. Measuring transparency as we
understand it in this article is not an easy task, among other things because it will never be
possible to completely disseminate information related to government activities in
accordance with the previous principles (Fung, 2013). However, metrics, especially
indicators, have been created that evaluate the way in which a public sector institution is
disseminating information either through web pages, spaces created for accountability and
participation, etc. In essence, these are indicators of regulatory compliance, which assign a
rating to each of the items considered and are weighted them according to their level of
compliance, for example, the indexes used by Transparency International to qualify local
governments for all the world. Other indicators are based on the perception of citizens or
other parties involved, basically surveys are conducted with the aim of creating a scale to
identify the real state of things in terms of transparency, for instance, Corruption Perceptions
Index CPI calculated by Transparency International.

2.2 Efficiency in public sector

The concept of productive efficiency (or of the firm) has been widely used by economists to
refer to the extent to which a productive unit is making optimal use of its resources (Shubik,
1978). However, the concept of efficiency has not only been used for the analysis of private
firms, there is a tendency to evaluate the activities of public entities under the desirable
assumption of optimal use of resources1.

Therefore, it has been necessary to develop efficiency measurement techniques adjusted to

the needs of the public sector. Following Mancebon (1999), the best way to measure the
performance of entities responsible for producing public goods and services is by calculating
their technical efficiency2, since it compares amounts and not monetary values at market
prices. Thinking that the State produces goods and services that do not exist in the market,
such as the drinking water service and others with complexities3 that include characteristics
that are difficult to capture in the data, such as in the education and health sectors; the concept
of technical efficiency is adjusted to the needs of the researcher, allowing him to analyse

1
In effect, citizens and other agents (especially government institutions and researchers) have increased their
interest in knowing how fiscal resources are redistributed. It is sought, among other things, that the coverage
and quantity of services offered by the State in the central or local scope is increased (Sandu, 2016) and
(Worthington & Dollery, 2000).
2
According to Farell (1957) in his seminal article The Measurement of Productive Efficiency, productive
efficiency is divided into two components : technical efficiency and allocative efficiency and the combination
of both gives us total efficiency. Technical efficiency is the combination of resources that allows companies
(public entity) to produce on an efficient frontier, and assignments that fall below it would be classified as
inefficient. On the other hand, the concept of allocative efficiency is that which minimizes production costs
from market prices (Farell, 1957).
3
According to Mancebon (1999) "The object of exchanging in the educational market is not, in effect, a
merchandise with physical entity and, therefore, directly observable, but it is constituted by elements of different
nature (knowledge and skills, attitudes, norms of behavior, values, etc.), produced together and difficult to
measure and aggregate in a single concept" (Mancebon, 1999).
effects and changes not present in the market, within the context of the process of public
production (Mancebon, 1999).

According to Sotiriadou (2010), there are two approaches to calculate technical efficiency,
the first is focused on the parametric estimation technique and the second on non-parametric
methods. Parametric methods are used with stochastic equations, which separate the effect
of random error and inefficiency. On the other hand, nonparametric methods are useful to
avoid confusion between specification errors and statistical inefficiency (Sotiriadou, 2010).
To estimate the efficiency by the non-parametric method, researchers use the Data
Envelopment Analysis (DEA) and the Free Disponsal Hull (FHD). This has made it possible
to calculate technical efficiency measures for public hospitals (Caballer & Moya , 2010) and
the education sector (Soteriou, Karahanna, & Papanastasiou, 1998), as well as for local
government administrations (Afonso & Fernandes, 2006). As will be seen later, the technique
used in Colombia to measure the efficiency of the municipalities is the DEA, which is
calculated for the health, education and drinking water sectors, but it will be explained later.

2.3 Transparency and efficiency: theoretical background

The role of transparency in public administration has been addressed in many fields of the
social sciences. However, there is currently a tendency to use a group of theories that have
allowed explaining their impact on economic side within the governance process. In a
democratic context, the economic analysis of its impact on the efficiency of public
administrations has become especially relevant given the growing demands of citizens. The
most worked have been the theory of agency, theory of crime and transaction cost analysis.
In public administration, an agency relationship can be found if we assign the title of principal
to citizenship and that of agent to public officials. In essence, the former requires the latter
to comply with a series of objectives ranging from the provision of certain basic goods and
services to an optimal administration of public resources. The agency relationship may be
affected in the presence of information asymmetry. It is probable that the (main) citizenry
lacks information on the activities, efforts and intentions of the ruler (agent) and in this way
the efficient and / or desired use of public resources is affected. Following to Picot and Wolff
(1994) "The problems of hidden action and hidden information present the worst threats to
the efficiency of agency-relationships. Both can be the roots of moral hazard problems (...)
especially in public administration (Picot & Wolff, 1994). The inputs used in the production
process ranging from machinery and equipment such as telephones, computers, office
equipment etc, to human capital can be used for other purposes that are not always in tune
with what is desired in a democratic environment where taxpayers demand that it be
administered efficiently and effectively. Additionally, there will always be the probability of
finding opportunistic actions by the agent, or what is the same, the interests of the rulers will
not always be aligned with those of the citizenry, which can also negatively affect the
production process.

Baumol (1990) and Murphy (1991) argued that transparency in the public sector turns out to
be a good mechanism to discourage corruption or rent-seeking activities (Baumol, 1990)
(Murphy, 1991) and in this way improve the efficiency of the public sector. A practical
explanation is provided Becker (1968) in his theory of crime. According to this theory, the
probability that an agent commits a crime (in our case it would be corruption) would depend
on the risk assumed, the possible gain and the possible punishment (Becker, 1968). In our
context, transparency increases the risk of being caught along with an increase in the
punishment that society would apply in the event of having more information about events
and public activities, in other words, a greater social sanction for the corrupt.

On the other hand, “transparency is based on the accessibility of information, which is a

public good that improves the functioning of markets and avoids market failures” (Stigler,
1961) and (Stiglitz, 2000). In a competitive market, the role of information is determinant in
the agents' decision-making process. It is possible to transfer this concept to the public
administration and to argue that all companies, institutions and agents of the public sector
together with the citizenry would make "better" decisions if their results and consequences
are known a priori. In addition, a higher level of information disclosure and transparency
reduces transaction costs4. “Transparency is...a key element in econocratic doctrines for
public policy to minimize transaction costs in the economy and in visions of open executive
government as a necessary entailment of democracy and legality. Transparency is central to
contemporary discussions of both democratic governance and public service reform, since
open access to information and elimination of secrecy is taken to be a condition for the
prevention of corruption and promoting public accountability” (Hood D. , 2001). However,
in public sector it has been argued that transparency needs must be addressed to the extent
that fraud and corruption can be discouraged because excessive levels of transparency result
in "overexposure" leading to losses in the effectiveness and efficiency through high levels of
transaction costs and excessive politicization or bureaucracy (Heald, 2003)5.

In short, a measure to correct the problem of agency in the public administration is that the
ruler is accountable to the public about their activities, and in this way, the cost and benefit
of certain measures and public policy decisions can be evaluated. that imply changes in the
production process. In addition, adequate levels of transparency may imply better levels of
efficiency and effectiveness in public administration, reducing transaction costs and making
corruption cases less likely and frequent.
2.4 Transparency and efficiency: empirical approaches on local government
Few studies have examined the impact of transparency on performance at the local level 6.
One of the most interesting empirical approaches was presented by Schaltegger and Torgler
(2006), who constructed a panel database with a fixed effects model for the Swiss cantons,

4
According to Williamson (1981), in an unrestricted and perfectly competitive market, transaction costs are
zero, that is, transactions do not involve ex ante or ex post costs. All decisions are made rationally and there is
no place for inefficiencies (Williamson, 1981).
5
But in this paper we will not address the overexposure effect of transparency since it is necessary another type
of technical analysis and kind of data that is not available at the moment for Colombia. For example, Luciano
Ciravegna et al. (2010) found that low levels of transparency in countries such as Chile, Argentina, Peru and
Brazil have a positive impact on the performance of companies in these countries. (Cuervo-Cazurra, Ciravegna,
& Melgarejo, 2018).
6
Citar algunos análisis que se han hecho a nivel internacional y explicar que se analiza en mayor medida el
impacto de la corrupción en el crecimiento económico, etc.
with which they were able to demonstrate that stronger levels of government accountability7
are causally related to better results in the performance of administrations (understood how
efficiency in the management of public resources)8. The authors used some control variables
to avoid the sub-overestimation of the parameter associated with government accountability,
among which are some political variables such as electoral participation, political culture,
female political participation and others with education, population and size of the canton
(Schaltegger & Torgler, 2007).
Another very recent study that managed to build a relationship between transparency and
efficiency was written by Lepore and Pisano (2017). In this article, was analyzed the impact
of e-disclosure information on the efficiency of Italian local governments 9. Specifically, the
authors used a data cross-sectional analysis with OLS for the year 2010 and 162 Italian local
governments. Additionally, were used control variables associated with the size and wealth
of the municipality, among other variables. The authors acknowledge that the estimation by
OLS in a cross-sectional analysis is not enough to obtain robust estimators, so they propose
to extend their study for the longitudinal period 2010-2015 through a panel data analysis,
however, the results have not yet been published (Lepore & Pisano, 2017).
The previous investigations have in common that they argue theoretically the causality
between transparency and efficiency through the theory of the agency. However, they do not
recognize that transparency can impact via corruption (moral hazard) and analysis of
transaction costs. It is vital to recognize the three theoretical points of view, since
transparency and all its expressions, related to the disclosure of government information of
all kinds, will impact efficiency in a different way, as previously explained.
In the case of the Colombian municipalities, Cano (2014) used cross-sectional data to
investigate the relationship between corruption and inefficiency10 on one side and poverty on
the other. The author uses OLS regression techniques controlling transparency with the total
expenditure of the municipal government, tax payment and variables associated with
geography such as altitude and latitude, among others. Cano acknowledges that the effect of
transparency on efficiency is a question of different research but does not develop the issue
(Cano, 2013). We propose to develop the idea proposed by Cano and expand the analysis
using panel data econometric techniques and for a sample of 1101 municipalities11 that
corresponds to 100% of the total number Colombian municipalities registered in the National
Department of Statistics (DANE, 2012).
This document continues with the research work done by Ortiz and Ordoñez (2018) who
found that transparency has a statistically significant impact on the efficiency of Colombian
municipalities. Authors used OLS with cross-sectional data and they found that the value of

7
According to Carothers and Brechenmacher (2014), the term "government accountability" is synonymous of
transparency since in a democratic government the institutions and their officials have the duty to disclose
information about public activities to electors (Carothers & Brechenmacher, 2014).
8
The authors use as a proxy dependent variable the per capita debt corresponding to each canton for the period
1981-2001
9
The authors use the financial autonomy of the local government as proxy variable of efficiency.
10
The authors used the transparency indicator calculated by Transparency International as proxy of
transparency. On the other hand, as a dependent variable they calculated an indicator of technical efficiency
that they estimated using the DEA technique.
11
Cano (2007) used a sample composed of 148 Colombian municipalities.
the parameter associated with transparency is between 0.14 and 0.3412 (Ortiz & Ordoñez,
2018). According to these considerations, we hypothesize that:

Hypothesis: The stronger the government transparency in a municipality, the better its
efficiency.

3. DATA
3.1 Presentation of the data
In the present work we analyze Colombian data for social, geographic, economic indicators
at the municipal level for 2010-2016 years provided by the Universidad de los Andes Data
Center. We proceed with definitions and description of the variables.
3.1.1 Dependet variable: Efficiency
To explore the local government's efficiency, we chose the technical efficiency component
of the National Planning Agency's (NPA) Integral Performance Index (IDI) in Colombia.
With a scale between 0 and 100, where 0 is the lowest level of efficiency and 100 is the
highest, the technical efficiency measures of the relationship between products obtained and
inputs used by the municipality in the process of producing goods and providing public
services. For the calculation of the efficiency indicator, the NPA used the nonparametric
estimation technique known as Data Envelopment Analysis (DEA) where the production
functions of the following sectors were specified13:
i) Education. Incorporates the data about the number of graduates at each educational level,
number of children and students enrolled, education quality (number of students with the
certain level of academic performance) as an output. Size of investments in education, total
area of classrooms and number of teachers qualified as highly competent are considered as
an input.
ii) Health. This category juxtaposes the information about the number of people affiliated
with Subsidized Health System, number of children vaccinated from one hand (outputs) and
total spending on the Health System, assurance, auditing and vaccination from the other hand
(inputs).
iii) Water provision. Being an essential public good in Colombia, cubic meters of water
produced by municipality and number of houses that have the water service as output and
total investment in drinking water for service provision as input.

12
This indicates that an increase in one point in the transparency indicator is causally reflected in the increase
of 0.14 to 0.34 in the efficiency indicator.
13
For more detailed information on the method of estimating the efficiency indicator go to the Guide to
Measure Municipal Performance in Colombia (NPA, 2017).
3.1.2 Independent variable: Transparency
Transparency "Transparency is the ability of the public to access government information"
(Tejedo-Romero, 2015). In other words, the local government releases information about its
activities to all interested parties (citizenship, public institutions of control, etc.).
Additionally, the information must be understandable. To measure transparency, we chose
the Open Government Index (IGA) calculated by the General Procuratory of the Nation
(GPN)14. It provides a numerical value between 0 (no transparency) and 100 (absolutely
transparent) that assesses the municipalities in three dimensions:
i) Organization of the information. In the first place, this sub-indicator comprises the
"Internal Control" that "ensures that all activities, operations and actions, as well as the
administration of information and resources, are carried out in accordance with the
constitutional and legal regulations in force” (GPN, 2016). On the other hand, Document
Management evaluates the level of implementation of Law 594 of 2000, which establishes
the rules and general principles that regulate the archival function in all State entities (Ibid).
We affirm that this last component is a requirement for the organization to be transparent:
without adequate information collection and organization, it cannot be accessible to the
citizens.
ii) Information disclosure. It incorporates activities tending to dispose, disseminate, present
or report information, and implies an open disposition from the entity towards external actors
such as monitoring and control organisms (GPN, 2016). It is necessary to clarify that the
municipalities are also evaluated according to the levels of information they report to the
control agencies located in Bogotá, which implies that this information is used by the central
government agencies to evaluate and execute public policies. However, the implicit idea of
open government is that this information is also available to citizens at the time they require
it.
iii) Dialogue about information. Refers to those mechanisms and actions of socialization,
explanation, justification and feedback with interest groups in application of the principles
of participatory democracy and democratization of public management (Ibid). This is the
other dimension of transparency: that citizens can interact with local government through
these spaces, in such a way that they are not just passive recipients of information according
to the principle of actionability.
When reliable information on local government projects is published, the information
asymmetry is reduced so that citizens and control actors can evaluate the way (costs and
benefits) in which resources are being managed. Now, with this additional information,
citizens and control actors have tools that allow them to exert pressure and making that public
resources are used in an efficient way, reducing transaction costs and levels of corruption.

14
For more detailed information on the method to measure the transparency index go to Open Government
Index (GPN, 2016).
Over the past thirty years, many studies aimed at determining the influence of external factors
on the effectiveness and performance of local governments were conducted (Borge, Falch, &
Tovmo, 2008). The estimated magnitude of the effect of different variables on municipality's
performance differs from paper to paper, not infrequently results contradict each other, the
effect of some determinants is vague. Due to the lack of a standard specification we follow
Narbon-Perpignan (2018) and divide all the variables into several groups (Narbón & De Witte,
2018).

3.1.3 Controls:
Social and demographic determinants
Population. A larger population may be associated with wider opportunities for public goods
provision for local governments; economies of scale or economies of scope may exist. On
the other hand, a larger population requires more people to be involved in the public sector.
This may lead to bureaucratization and other inefficiencies. So, the predicted effect on
efficiency is undefined and possibly nonlinear (Doumpos & Cohen, 2014). Populations is a
numerical variable that represents the size of the city in terms of inhabitants (in thousands).
Population growth. Increase of population drives the demand for public goods. This
complicates the public goods provision as in order to be efficient the local government
activity should be consistent with the rate of population growth. If government provide of
good and services according to the increasing demand, so de efficiency can arise, otherwise,
it goes down (Afonso & Fernandes, 2008). Population growth is a numerical variable
presented in percentage.
Education. If the levels of education in a municipality is high, when it comes to public goods
provision people are more demanding. In this way, citizens put pressure for a more efficient
government. Moreover, if population is more educated, local government can employ more
competent labor force thereby improving efficiency (Da Cruz & Marques , 2014). This
indicator is calculated how the total people that are considered how “literate people” divided
by the total of population in each municipality.

Political determinants
Ideological position. The basic hypothesis is that left-wing parties prefer a larger public
sector which, in general, is associated with low efficiency levels (De Borger & Kerstens ,
1996). However, there is no consensus about this kind of results, for instance, Andrews and
Entwistle (2015) concluded that a municipality in which the ideology on left-wing is stronger
is associated with greater efficiency since there may be a greater presence of working-class
voters who would put pressure to get a more efficient government (Andrews & Entwistle,
2015). We measure the ideology of a municipality how result of the plebiscite on peace
process that took place on October 2nd, 2016 in Colombia. It takes value 1 if more than 50%
of the total votes in a municipality supported the peace agreement with “Yes”, and 0
otherwise15.
Electoral turnout. Participation in the democratic procedures may characterize the population
as more politically active. If it is the case, citizens participate in public life thereby impeding
inefficient activity of the local authorities. From the other side, Asatryan, Zareh, and Kristof
De Witte (2015) noticed that inefficient governments may instigate population to participate
in the vote process, so the effect of voter turnout on the efficiency is obscure (Asatryan & De
Witte, 2015). This is a numerical variable that show the total votes in elections for mayor
divided by population.
Mayor gender. The characteristics of a manager in theory can influence the efficiency of
decision making. Thus, the standard specification includes such characteristics as sex and
age of the mayor. Some authors argue that men are more politically active than woman, so it
can to have an impact in the performance of a government of a man (Piotrowski & Van Ryzin,
2007). However, Both Boetti at el (2012) and Dal Bianco (2015) found no statistical effect
of the mayor’s gender on efficiency (Boetti & Piacenza, 2012) and (Dal Bianco &
Lombardia, 2015). This is a dummy variable that takes value 1 if the mayor elected was a
woman and 0 otherwise.

Geographical determinants
Distance from capital. If a municipality is far removed from capital this hinders the control
of the central authorities and may potentially worsen the efficiency. In addition, Afonso and
Fernandes (2008) stated that closeness to the capital drives the competition among the
municipalities (Afonso & Fernandes, 2008). This is a numerical variable that show the
distance in km between any municipality to Bogotá D.C (the capital city).
Area. A large area that is subordinate to local authorities may be associated with lower levels
of efficiency of a municipality. For instance, the provision of public goods and infrastructure
construction is secured at lower costs in small municipalities, which makes them more
efficient (Ibrahim & Karim, 2004). Area is a numerical variable that measures the extent in
km2 of a municipality.
Coast. A bunch of papers introduce variables for other geographical characteristics. The
climate may affect costs of conducting different type of governmental activities, that, in its
turn affect efficiency. For example, Moore at el. (2005) found that average temperature
affects local government efficiency. Based on the same reasoning, we incorporate closeness
to coast as additional geographic variable (Moore, Nolan, & Segal G, 2005). Coast is a

15
Policy analysts in Colombia argued that the results of the plebiscite can be explained by a marked partisan
ideological tendency. According to (Semana, 2016), political parties that can currently be considered left or
center, in their vast majority, supported the peace agreements. On the other hand, more conservative or
right-wing parties had a great impact on the results of plebiscite against the agreements.
dummy variable that take value 1 if the municipality is located in a coastal region and 0
otherwise.

Economic and financial determinants

Budget. As governments with high revenues are able to provide public goods even being not
efficient, the predicted effect of this variable on performance is negative. The similar point
can be found in Carosi et al. (2014) who concluded that higher tax revenues per capita are
associated with higher level of wasteful spendings (Carosi, D’Inverno, & Ravagli, 2014).
Yusfany (2015) also found that excess budget can negatively affect efficiency, since local
bureaucrats tend to maximize the size of each year's budget with the objective of capturing
resources for private benefits (Yusfany , 2015). This is a numerical variable that is measured
how total budget of a municipality in millions of pesos divided by population.
Debt. The effect of debt size on effectiveness is ambiguous. The presence of debt indicates
the territorial entity has the ability to pay. Moreover, debt may be the evidence of some
investments in the past. In this context higher indebtness may be associated with higher
efficiency. However, accrued debt entails high interest payments, that, drives the efficiency
down. Given these, the predicted effect of the debt amount on efficiency is unclear. In some
papers the Revelli and Tovmo (2007) the effect estimated as insignificant (Revelli & Tovmo,
2007). This indicator measures the backed level of the territorial entity for debt servicing. It
is obtained as the proportion of the income that is supporting the debt service
Investment. According to Geys and Moesen (2009), high capital investment in a given year
encourages cost savings on current expenditures. Therefore, higher investment expenditure
would increase municipal efficiency (Geys & Moesen, 2009). Arcelus and Arocena (2015)
found that past investment in capital or infrastructure are related with more modern
endowments in the present what allows to improve the performance and efficiency (Arcelus
& Arocena, 2015). This variable is a percentage of expenditures of the municipality in Gross
Fixed Capital Formation (GFCF).

Fiscal. The main hypothesis is that there is a positive relationship between high tax levels
and efficiency levels (Ferejohn, 1999). In essence, citizens are aware of the high levels of
taxes they pay and as a consequence will require the local government to administer them
efficiently. For instance, Benito et al (2010) found a positive relationship between the tax
burden and the efficiency levels (Benito, Bastida F, & Garcia J, 2010). This is a numerical
variable that is measured by the sum of direct and indirect taxes in millions of pesos and
divided by population.
Deficit. The main hypothesis is that municipalities with higher surpluses have better financial
performance and also witness higher government efficiency ratings (Geys, 2006). This is a
numerical variable that is measured by the difference between the current and the current
local government expenses in millions of pesos and divided by population.
3.2 Descriptive statistics

The data for the empirical estimation can be found at the Universidad de los Andes Data
Center. Specifically, we used two panels16:
- CEDE’s municipal panel
- Electoral database

CEDE's municipal panel provides the data on education variables, fiscal, financial, general
characteristics of the municipality and indicators of efficiency and transparency. All the
variables have been calculated by two public entities: National Planning Agency and General
Procuratory of the Nation. We used the data available at 14:40 14.09.2018

To calculate all the political variables such as electoral turnout, ideology and gender major
we used the Electoral database. This data is taken from the database of the National Civil
Registry. Additionally, the data about population estimates were taken from the database of
the National Administrative Department of Statistics (DANE)17. We used the data available
at 15:25 14.09.2018.

The merged dataset is compounded of three mentioned databases and consists of 5272
observations for 947 municipalities for the years 2010-2016. Summary statistics for the
variables is contained in the Table 1 and Table 2.

Table 1. Descriptive statistics for the continuous variables

Variable Number of Mean Standard Minimum Maximum
observations deviations
Efficiency index 5272 54.41 14.22 9.15 98.88

Transparency index 5272 60.99 12.90 16.87 94.51

deficit 5272 0.14 0.87 -10.35 5.35

budget 5272 1.14 5.90 0.00 14.06

debt 5272 4.04 5.96 -3.59 100.00

Investment 5272 85.82 8.83 0.00 98.11

fiscal 5272 0.15 0.21 0.00 4.03

distance 5272 307.5 193.2 0.00 1270.

area 5272 918.2 3329.93 20.0 65674.0

16
https://datoscede.uniandes.edu.co/en/catalogo-de-microdata. Note: to obtain these data you must be
registered at Data Center.
17
https://www.dane.gov.co/files/investigaciones/poblacion/proyepobla06_20/Municipal_area_1985-2020.xls
 population 5272 37994 211411.2 968 7980001

population_growth 5272 0.4672 1.26 -3.85 4.5583

participation 5272 0.44514 0.57 0.01 13.99330

abc 5272 7225.5 17837.65 179.7 543509.5

Table 2. Descriptive statistics for the dummy variables

Variable Number of Percentage Standard
observations of ones deviations
Coast 5272 0.36 0.47

Ideology 5272 0.51 0.49

Gender 5272 0.09 0.29

The merged dataset accounts for 947 out of 1122 or 84,3% of all municipalities in Colombia.
Moreover, although the data in the initial datasets is longitudinal, we end up with unbalanced
panel. The reason for the loss of observations is purely technical, so we consider the sample
as comprehensive, meaning that the availability of the observations in our sample doesn’t
have any functional form.

The dataset was checked for the presence of the outliers. All the observations that are
removed for more than three interquartile ranges from the first and third and quartiles were
treated as outliers because this subset encompasses implausible values for the variable
participation (more than one, while by definition it is bounded between 0 and 1). However,
this operation didn’t cure the problem of the improbable values, so we proceed with dropping
of the observations associated with the 1st and 99th percentile of the participation variable.
Thus, the filtered dataset consists of 5052 observations for 936 municipalities. Summary
statistics for continuous and binary variables is presented in Table 3 and Table 4.
Table 3. Descriptive statistics for the continuous variables of the efficient dataset
Variable Number of Mean Standard Minimum Maximum
observations deviations
Efficiency index 5052 54.51 14.28 9.15 98.88

Transparency index 5052 61.02 12.88 16.87 94.51

deficit 5052 0.14 0.85 -10.35 5.35

 budget 5052 1.12 5.89 0.00 14.06

debt 5052 4.09 5.96 -3.59 100.00

investment 5052 86.06 7.54 0.00 98.11

fiscal 5052 0.15 0.21 0.00 4.03

distance 5052 306.1 193.2 0.00 1270.9

area 5052 870.4 3082.72 20.0 65674.0

population 5052 39122 215868.4 976 7980001

population_growth 5052 0.4754 1.25 -3.85 4.5583

participation 5052 0.39 0.16 0.07 0.82

abc 5052 7351.3 18101.51 179.7 543509.5

Table 4. Descriptive statistics for the dummy variables of the efficient dataset
Variable Number of Percentage Standard
observations of ones deviations
Coast 5052 0.35 0.47

Ideology 5052 0.50 0.50

Gender 5052 0.09 0.29

We can see in table 3 that the average result of the municipalities in terms of the efficiency
indicator during the analyzed period is 54.51 with an associated standard deviation of 14.28.
Another interesting result is provided by the result of the minimum (9.15) and maximum
(98.88) which indicates that there are probably municipalities that are far from the results of
optimal efficiency. On the other hand, the transparency indicator for the Colombian
municipalities shows an average of (61.02) for the whole period analyzed, a higher result
than for the case of the efficiency indicator with an associated dispersion of (12.88).
According to this, it can be seen that likely there are municipalities that very far away from
the optimal results given the results of the minimum (16.87), maximum (94.51) and standard
deviation.
Additionally, we can observe that the statistics of the control variables behave as expected
(given the correction made for outliers). Two results were obtained in the statistics of dummy
variables are not deprived of some curiosity (ideology and gender). In the case of ideology,
it is interesting to see how a half of the municipalities can be classified as followers of the
political left-side and the other half of the political right-side, which explains the ideological
fragmentation and polarization that has been criticized in Colombia (Silva , 2014). In
addition, our statisticians are consistent with the published results of the plebiscite where
50.23% of the total votes were against the peace agreements and the other 49.76% in support
(National Civil Registry, 2016). In the case of gender, it is striking how only 9% of local
governments have a woman mayor, which poses serious challenges in terms of gender
equality and discrimination.

4. ECONOMETRIC MODEL
We estimate the following econometric model:
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦𝑖 = 𝛽0 + 𝛽1 𝑡𝑟𝑎𝑛𝑠𝑝𝑎𝑟𝑒𝑛𝑐𝑦𝑖 + 𝛽2 𝑑𝑒𝑓𝑖𝑐𝑖𝑡𝑖 + 𝛽3 𝑏𝑢𝑑𝑔𝑒𝑡𝑖 + 𝛽4 𝑑𝑒𝑏𝑡𝑖
+ 𝛽5 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑖 + 𝛽6 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖 + 𝛽7 𝑎𝑟𝑒𝑎𝑖 + 𝛽8 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛𝑖
+ 𝛽9 ln(𝑓𝑖𝑠𝑐𝑎𝑙𝑖 ) + 𝛽10 𝑝𝑜𝑝_𝑔𝑟𝑜𝑤𝑡ℎ𝑖 + 𝛽11 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽12 𝑎𝑏𝑐𝑖
+ 𝛽13 𝑖𝑑𝑒𝑜𝑙𝑜𝑔𝑦𝑖 + 𝛽14 𝑔𝑒𝑛𝑑𝑒𝑟𝑖 + 𝛽15 𝑐𝑜𝑎𝑠𝑡𝑖 + 𝑢𝑖
where
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦𝑖 is efficiency index of a municipality i;
𝑡𝑟𝑎𝑛𝑠𝑝𝑎𝑟𝑒𝑛𝑐𝑦𝑖 – transparency index of municipality i;
𝑑𝑒𝑓𝑖𝑐𝑖𝑡𝑖 – deficit of a municipality divided by population, mln pesos per capita;
𝑏𝑢𝑑𝑔𝑒𝑡𝑖 –budget of municipality divided by population, mln pesos;
𝑑𝑒𝑏𝑡𝑖 – indicator of the debt servicing;
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑖 – share of expenditures dedicated to investment in infrastructure, %;
𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖 – distance between the municipality center and the capital, km;
𝑎𝑟𝑒𝑎𝑖 – area of a municipality, km2;
𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛𝑖 – population of a municipality, mln people;
𝑓𝑖𝑠𝑐𝑎𝑙𝑖 – sum of all direct and indirect taxes divided by population;
𝑝𝑜𝑝_𝑔𝑟𝑜𝑤𝑡ℎ𝑖 – the year over year population growth, %;
𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛𝑖 – voter turnout, share;
𝑎𝑏𝑐𝑖 – alphabetization index;
𝑖𝑑𝑒𝑜𝑙𝑜𝑔𝑦𝑖 – proxy for an ideology of a municipality, 1 if voters supported peace process;
𝑔𝑒𝑛𝑑𝑒𝑟𝑖 – gender of a mayor, 1 if female;
 𝑐𝑜𝑎𝑠𝑡𝑖 – proximity to the coast, 1 if municipality is located in the region that adjoins the
sea.

We made the following the assumptions about the model:

H1. Linearity. Model is correctly specified and linear in parameters.
H2. Strict erogeneity. 𝐸(𝑢𝑖 | 𝑿) = 0.
H3. No multicollinearity. The matrix 𝑋′𝑋 is of full rank and invertable.
H4. Heteroscedasticity. 𝑉𝑎𝑟 (𝑈/𝑋) = 𝜎 2 𝐼
H5. 𝐶𝑜𝑣 (𝑋, 𝑈) = 0
𝑋′𝑈
H6. plim =0
𝑛→∞ 𝑁
𝑍′𝑈
H7. plim =0
𝑛→∞ 𝑁
𝑋′𝑋
H8. plim = 𝑄𝑥𝑥 a positive definite matrix
𝑛→∞ 𝑁
𝑍′𝑋
H9. plim = 𝑄𝑧𝑥 a matrix of full rank.
𝑛→∞ 𝑁
𝑍′𝑍
H10. plim = 𝑄𝑧𝑧 a positive definite matrix.
𝑛→∞ 𝑁

5. RESULTS

We proceed with the estimation of the linear model. Table 5 provides the result of OLS,
Between, Within, First Difference and Feasible GLS estimation.

Table 5. Estimation of the model using OLS, Between, Within, FD, FGLS estimators
OLS Between Within FD FGLS

Coeff. S.E. Coeff. S.E. Coeff. S.E. Coeff. S.E. Coeff. S.E.
Intercept 46.71*** 2.55 55.70*** 5.55 30.76*** 6.21 40.74*** 7.54 49.46*** 2.81
transparency 0.28*** 0.01 0.34*** 0.03 0.09*** 0.02 0.11*** 0.02 0.12*** 0.02
deficit 1.28 0.77 1.69 1.60 1.68 0.92 1.17 0.99 1.77* 0.81
budget -2.62*** 0.26 -3.59*** 0.53 -0.46 0.37 -0.74 0.41 -0.99** 0.32
debt -0.01 0.03 0.04 0.07 -0.05 0.03 -0.03 0.03 -0.03 0.03
investment -0.03 0.02 -0.09 0.06 -0.001 0.02 -0.01 0.02 -0.01 0.02
distance -0.01*** 0.001 -0.007*** 0.002 . . . . -0.02*** 0.003
area -0.0002*** 0.00005 -0.0002*** 0.00009 . . . . -0.0003* 0.0002
population -7.04*** 2.16 -9.51*** 3.44 -44.10** 18.75 -152.44 86.63 -14.65** 5.33
fiscal_ln 2.71*** 0.25 3.03*** 0.40 0.03 0.48 0.61 0.54 1.062** 0.37
pop_growth 0.09 0.16 -0.35 0.26 -0.24 1.44 -1.64 1.43 0.18 0.38
participation 3.83 2.03 -2.25 3.40 -2.81 3.23 -8.61 5.26 -0.16 2.70
abc 0.0002*** 0.00002 0.0002*** 0.00004 . . . . 0.00031*** 0.00007
ideology -2.09*** 0.39 -1.67*** 0.63 . . . . -2.72* 1.06
gender 0.94 0.56 1.00 1.31 1.07 0.62 0.67 0.87 1.02 0.56
coast 1.79*** 0.52 1.51 0.84 . . . . 0.98 1.40
2011 11.14*** 0.55 11.29*** 0.45 11.27*** 0.41 11.21*** 0.42
2012 -0.93 0.86 3.81*** 1.02 5.11*** 1.55 2.59 0.89
2013 2.09** 0.86 6.73*** 1.04 8.08 1.66 5.49*** 0.89
2014 -2.41*** 0.83 1.61 1.03 2.97*** 1.74 0.36 0.87
2015 5.33*** 0.84 9.96*** 1.07 11.22*** 1.85 8.50*** 0.89
2016 8.18** 0.81 12.99*** 1.08 14.27 2.02 11.46*** 0.90

DF 5024 936 4094 4094 5024

R2 0.322 0.388 0.639 0.414 0.256

A superficial examination of the Table 5 shows that coefficients are very sensitive to the
applied technique of estimation, both in terms of significance and magnitude. Estimates of
the effect of transparency vary between 0.09 and 0.28, whereas the significance of association
of the change in budget, population or fiscal pressure with the change in the efficiency differ
with the estimation approach. The results of this kind suggest that some of the H1-H10
assumptions could be violated. These are assumptions related to strict exogeneity, caused by
the reverse causality/simultaneity or/and measurement errors. The former possibly refers to
budget as efficiency not only depends on the size of a municipality budget, but the budget
may be determined by efficiency; the endogeneity of transparency index could be justified
by measurement errors.
With endogenous regressors the estimates in the Table 5 are biased and inconsistent. So, we
extend our econometric analysis with IV/GMM estimation: the results can be found in
Table 6.
Table 6. Estimation of the model with OLS, IV, GMM
OLS IV GMM
Coeff. S.E. Coeff. S.E. Coeff. S.E.
Intercept 46.71*** 2.55 2.31 11.92 2.02 13.50
transparency 0.28*** 0.01 0.47*** 0.13 0.46*** 0.14
deficit 1.28 0.77 21.82 11.87 22.17 13.20
budget -2.62*** 0.26 -13.06* 6.39 -13.27 7.17
debt -0.01 0.03 -0.16** 0.06 -0.17 0.09
investment -0.03 0.02 0.35 0.24 0.36 0.28
distance -0.01*** 0.001 -0.003 0.0043 -0.003 0.005
area -0.0002*** 0.00005 -0.00011 0.0001 -0.0001 0.0001
population -7.04*** 2.16 18.68*** 5.21 18.77*** 5.51
fiscal_ln 2.71*** 0.25 4.07** 1.59 4.15** 1.76
pop_growth 0.09 0.16 -0.39 0.49 -0.40 0.56
participation 3.83 2.03 17.45 9.30 17.67 10.37
abc 0.0002*** 0.00002 1.043E-7 0.00006 -2.22E-6 0.000067
ideology -2.09*** 0.39 -0.14 1.31 -0.078 1.41
gender 0.94 0.56 3.25* 1.58 3.22 1.77
coast 1.79*** 0.52 0.45 1.95 0.30 2.14
2011 11.14*** 0.55 4.46** 1.47 4.55 1.54
2012 -0.93 0.86 1.29 1.36 1.31 1.36
2013 2.09** 0.86 8.48 1.32 8.50** 1.44
2014 -2.41*** 0.83 11.41 1.02 11.43 1.04
2015 5.33*** 0.84 2.31*** 11.92 2.019*** 13.51
2016 8.18** 0.81 0.46*** 0.12 0.46*** 0.14

It is necessary to have at least three instruments in order to tackle the problem of endogeneity
of two variables and check the validity of this instruments. The difference between the second
and the first lag of the transparency index, the difference between the second and the first lag
of the efficiency index and the first lag of transparency were chosen as internal instruments.
In order to carry the estimation out, three condition should be met. First, instruments should
be correlated with depended variable. Second, instruments should not be correlated with
residuals. Third, instruments should not be perfectly collinear. Since the second condition is
hold by construction of the internal instruments, we continue with test of overidentification
restrictions or simply test if the instruments are “good”.
Table 7. Hansen and White statistics
Test Statistics DF p-value
White's Test 2176 98 <.0001
Hansen 0.63 1 0.4278

First we test the presence of heteroscedasticity in the model. White’s statistics under the null
hypothesis of homoscedasticity of residuals provides us p-value less close to zero, which is
an evidence of heteroscedasticity (Table 7).
In the presence of heteroscedasticity, Sargan statistics not valid anymore for testing the
overidentifying restrictions, the Hansen statistics was applied. P-value equals to 0.4278
justify instruments as good.

Table 8. P-value under H0: the endogenous variable (horizontal) is uncorrelated with
corresponding instrument (vertical)
Transparency index Budget
Transparency index (lag1) <.0001 <.0001
 Transparency index Budget
Transparency index difference (lag 2 – lag1) <.0001 <.0001
Efficiency index (lag 2 – lag1) 0.0383 0.3890

To check if there is correlation between the instruments and endogenous variables, we run
one by one OLS of all endogenous variables on all exogenous variables and instruments. The
coefficients of interest are shown in the Table 8. All three instruments are correlated with the
transparency index and two of three instruments are correlated with the budget. Taking
residuals from both regressions we can finally test if the variables were really endogenous.
Table 9. The coefficients of the residuals in the augmented regression
Coeff. SE t-stat p-value
Transparence index residuals -0.21 0.10 -1.92 0.054
Budget residuals 10.97 5.36 2.05 0.040

The result of augmented regression with robust errors are presented in the Table 9. While
residuals of the transparency index are marginally significant (significant on 6% significance
level), variable “Budget” proved to be endogenous in the initial model. In this way we arrived
at GMM estimator as the most reliable results in the present work. In the succeeding section
we conclude with economic analysis of the results and final remarks.

6. CONCLUSION AND DISCUSSION

The objective of this work was to analyze the impact of transparency on the efficiency of
Colombian local governments using panel data analysis for the period 2010-2016. The study
employed techniques of linear models estimation in the presence of heteroscedasticity and
endogeneity.

The results of the empirical exercises showed that transparency - narrowly understood
through the criteria of regulatory compliance measured by the Open Government Index - has
a statistically significant association in the efficiency of local government for the entire
period of time analyzed. This relationship persists even by adding controls associated with
sociodemographic, geographic, political, and economic factors. According to the estimates,
an increase in one point in transparency is associated with an increase of 0.46 points in
efficiency, confirming our initial hypothesis.

These results are consistent with the postulates of the theory of the agency, analysis of
transaction costs and problems of moral hazard. In the first place, it is valid to consider that
citizens exert pressure so that resources are administered efficiently and demanding that the
local government render them accountable by disseminating public information of quality
according to the participative transparency principles, correcting the problem of asymmetry
of the information. In addition, it is coherent to argue that the dissemination of local
government information reduces transaction costs, making corruption less likely and causing
public agents and citizens to make decisions in accordance with the principles of optimal and
efficient use of resources.

In addition, we found empirical evidence associated with other factors that influence the
levels of efficiency of the municipalities. First, the variable fiscal (fiscal) pressure had a
significant and positive effect on the levels of efficiency, anticipating great challenges with
regard to a public accounting and reporting system that offer information to both the public
and other parties. interested in tax collection, which leads to a considerable reduction of
agency costs within the public sector and local governments in general18. Finally, the
population levels that represent the size of the municipality reflected possible effects of
economies of scale and economies of scope by having a positive effect on efficiency.

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