Capital Labor Substitution in Municipal Government

Abstract

City governments utilize both capital and labor to produce the services that the public demands. This article synthesizes the public choice literature and the theory of dynamic factor demands developed for private firms. The problem encountered in analyses of the public sector of no direct measures of output is bypassed through the use of a public choice function. The short- and long-run elasticities of substitution are estimated for large city governments using data for 46 separate cities over the period 1954 to 1986. The empirical estimates indicate that in both the short and long run, large city governments are responsive to factor price changes. The production technology is not neutral with respect to the scale determining variables contained in the public choice model.