Static and dynamic translog cost models for the aggregate U.S. state and local
government sector are estimated for 1952 to 1985. Inputs are capital, labor, and a
combined nondurable goods and other services input, which includes "privatized"
services. Estimates show that capital and labor are complements and own-price
inelastic. The nondurable-service input is a substitute for both labor and capital and
has an own-price elasticity closer to unity. It is used relatively more as the sector
expands. The results offer an explanation for the characterization of the government
as a low productivity industry and show an economic rather than political motivation
for the privatization of some public services.
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