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Incentives and the Efficiency of Public Sector-outsourcing Contracts

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  • Paul H. Jensen
  • Robin E. Stonecash

Abstract

Outsourcing the provision of traditionally publicly provided services has become commonplace in most industrialized nations. Despite its prevalence, there still is no consensus in the academic literature on the magnitude (and determinants) of expected cost savings to the government, nor the sources of those savings. This article considers the arguments for (and against) outsourcing and then examines the empirical evidence pertaining to whether any observed savings occur and whether they persist over time. In addition, we examine the existing evidence for the 'redistribution hypothesis' and the 'quality-shading hypothesis', which critics have used to argue that outsourcing lowers government expenditure by lowering wages and conditions and/or lower quality services. Finally, we consider the impact of contract design on outsourcing outcomes. While the power of incentives is a strong theme in economics, recent work has suggested that high-powered incentives may be suboptimal for many public sector services, because they may crowd out intrinsic motivation, particularly in instances where agents are highly motivated. We discuss the implications of this insight for the efficiency of public sector outsourcing. Copyright Blackwell Publishers Ltd, 2005.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 19 (2005)
Issue (Month): 5 (December)
Pages: 767-787

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Handle: RePEc:bla:jecsur:v:19:y:2005:i:5:p:767-787

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Cited by:
  1. Veeneman, Wijnand & Koppenjan, Joop, 2010. "Securing public values in public transport projects: Four Dutch cases on innovation," Research in Transportation Economics, Elsevier, vol. 29(1), pages 224-230.
  2. Andersson, Fredrik & Jordahl, Henrik, 2011. "Outsourcing Public Services: Ownership, Competition, Quality and Contracting," Working Papers 2011:20, Lund University, Department of Economics.
  3. Bergman, Mats & Johansson, Per & Lundberg, Sofia & Spagnolo, Giancarlo, 2014. "Privatization and Quality: Evidence from Elderly Care in Sweden," CEPR Discussion Papers 9939, C.E.P.R. Discussion Papers.
  4. Morten Bennedsen & Christian Schultz, 2007. "Arm’s Length Provision of Public Services," CESifo Working Paper Series 2161, CESifo Group Munich.
  5. Henrekson, Magnus & Stenkula, Mikael, 2009. "Entrepreneurship and Public Policy," Working Paper Series 804, Research Institute of Industrial Economics.
  6. Jorge Guardiola & Francisco González-Gómez & Miguel A. García-Rubio, 2008. "Is the time dimension really important in research into contracting out?," FEG Working Paper Series 08/02, Faculty of Economics and Business (University of Granada).
  7. MacDonald, Peter, 2013. "Labour substitution and the scope for military outsourcing," MPRA Paper 46688, University Library of Munich, Germany.
  8. Alonso, Jose M. & Clifton, Judith & Díaz-Fuentes, Daniel, 2011. "Did New Public Management Matter? An Empirical Analysis of The Outsourcing and Decentralization Effects on Public Sector Size," MPRA Paper 43255, University Library of Munich, Germany.
  9. Spagnolo, Giancarlo & Bergman, Mats A. & Lundberg, Sofia, 2012. "Privatization and Quality: Evidence from Elderly Care in Sweden," SITE Working Paper Series 19, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  10. Liat Raz-Yurovich, 2012. "Application of the transaction cost approach to households – the demographics of households’ ‘make or buy’ decisions," MPIDR Working Papers WP-2012-025, Max Planck Institute for Demographic Research, Rostock, Germany.
  11. Bennedsen, Morten & Schultz, Christian, 2011. "Arm's length delegation of public services," Journal of Public Economics, Elsevier, vol. 95(7), pages 543-552.
  12. José Manuel Cordero Ferrera & Francisco Pedraja Chaparro & Javier Salinas Jiménez, 2009. "Efficiency measurement in the Spanish cadastral units through DEA," Working Papers 2009/35, Institut d'Economia de Barcelona (IEB).

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