IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i24p7231-d298714.html
   My bibliography  Save this article

Sustainability of Public Services: Is Outsourcing the Answer?

Author

Listed:
  • Antonio Sánchez Soliño

    (Construction Department, Universidad Politécnica de Madrid, ETS Ingenieros de Caminos, calle Profesor Aranguren s/n, 28040 Madrid, Spain)

Abstract

The outsourcing of public services has acquired a prominent position in the political agenda of many countries in recent decades. This paper contributes an analysis of the outsourcing of a public service under a theoretical framework based on a multitask principal-agent model. For the management of the service, a contract is assumed that includes certain incentives to the contractor linked to the outcomes in two types of activities: the first related to cost saving, and the second related to the improvement of the quality of the service. The main results of the paper show, in the first place, the conditions under which the outsourcing of a public service is economically unfeasible. Additionally, the paper shows that, under perfect information conditions, the optimal incentives include the contractor retaining all the cost savings. On the contrary, under conditions of asymmetric information on the quality of the service, the contract should stipulate a certain distribution of the cost savings between the public authority and the contractor. More in general, the formalization of the model presented in this work can contribute to a better understanding of the role of the contracts, and therefore to their improvement.

Suggested Citation

  • Antonio Sánchez Soliño, 2019. "Sustainability of Public Services: Is Outsourcing the Answer?," Sustainability, MDPI, vol. 11(24), pages 1-12, December.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:24:p:7231-:d:298714
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/24/7231/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/24/7231/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages 69-76, March.
    2. Erik Canton, 2005. "Power of Incentives in Public Organizations When Employees Are Intrinsically Motivated," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(4), pages 664-680, December.
    3. Paul A. Grout & Margaret Stevens, 2003. "The Assessment: Financing and Managing Public Services," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 19(2), pages 215-234, Summer.
    4. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
    5. Malgorzata Pankowska, 2019. "Information Technology Outsourcing Chain: Literature Review and Implications for Development of Distributed Coordination," Sustainability, MDPI, vol. 11(5), pages 1-28, March.
    6. Paul A Grout & Margaret Stevens, 2003. "Financing and Managing Public Services: An Assessment," The Centre for Market and Public Organisation 03/076, The Centre for Market and Public Organisation, University of Bristol, UK.
    7. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    8. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1127-1161.
    9. Simon Burgess & Marisa Ratto, 2003. "The Role of Incentives in the Public Sector: Issues and Evidence," The Centre for Market and Public Organisation 03/071, The Centre for Market and Public Organisation, University of Bristol, UK.
    10. Fredrik Andersson & Henrik Jordahl & Jens Josephson, 2019. "Outsourcing Public Services: Contractibility, Cost, and Quality," CESifo Economic Studies, CESifo Group, vol. 65(4), pages 349-372.
    11. Riess, Armin, 2005. "Is the PPP model applicable across sectors?," EIB Papers 6/2005, European Investment Bank, Economics Department.
    12. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    13. Eggleston, Karen, 2005. "Multitasking and mixed systems for provider payment," Journal of Health Economics, Elsevier, vol. 24(1), pages 211-223, January.
    14. Baron, David P & Besanko, David, 1988. " Monitoring of Performance in Organizational Contracting: The Case of Defense Procurement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 329-356.
    15. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    16. Simon Burgess & Marisa Ratto, 2003. "The Role of Incentives in the Public Sector: Issues and Evidence," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 19(2), pages 285-300, Summer.
    17. Salvador Barrios & Jonathan Pycroft & Bert Saveyn, 2013. "The marginal cost of public funds in the EU: the case of labour versus green taxes," Taxation Papers 35, Directorate General Taxation and Customs Union, European Commission.
    18. Avinash Dixit, 2002. "# Incentives and Organizations in the Public Sector: An Interpretative Review," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 696-727.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul H. Jensen & Robin E. Stonecash, 2005. "Incentives and the Efficiency of Public Sector‐outsourcing Contracts," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 767-787, December.
    2. Paul H. Jensen & Robin E. Stonecash, 2004. "The Efficiency of Public Sector Outsourcing Contracts: A Literature Review," Melbourne Institute Working Paper Series wp2004n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    3. Makris, Miltiadis, 2009. "Incentives for motivated agents under an administrative constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 428-440, August.
    4. Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
    5. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    6. Pierre Koning & J. Vyrastekova & S. Onderstal, 2006. "Team incentives in public organisations; an experimental study," CPB Discussion Paper 60, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    8. Alena Podaneva & Pierre Picard, 2023. "Facility Management Services in UK Hospitals: in-house or outsourcing," DEM Discussion Paper Series 23-15, Department of Economics at the University of Luxembourg.
    9. Pouliakas, Konstantinos & Theodoropoulos, Nikolaos, 2009. "Performance Pay as an Incentive for Lower Absence Rates in Britain," MPRA Paper 18238, University Library of Munich, Germany.
    10. Patrick Francois, 2007. "Making a difference," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 714-732, September.
    11. Carolyn J. Heinrich & Gerald Marschke, 2010. "Incentives and their dynamics in public sector performance management systems," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(1), pages 183-208.
    12. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
    13. Dantas Gurgel, Garibaldi & Kristensen, Søren Rud & da Silva, Everton Nunes & Gomes, Luciano Bezerra & Barreto, Jorge Otávio Maia & Kovacs, Roxanne J & Sampaio, Juliana & Bezerra, Adriana Falangola Ben, 2023. "Pay-for-performance for primary health care in Brazil: A comparison with England's Quality Outcomes Framework and lessons for the future," Health Policy, Elsevier, vol. 128(C), pages 62-68.
    14. Lazzarini,Sergio G., 2022. "The Right Privatization," Cambridge Books, Cambridge University Press, number 9781316519714.
    15. Nannerup, Niels & Olsen, Kasper Krogh, 2014. "Multitasking and performance measurement," Discussion Papers on Economics 20/2014, University of Southern Denmark, Department of Economics.
    16. Dietrichson, Jens, 2013. "Coordination Incentives, Performance Measurement and Resource Allocation in Public Sector Organizations," Working Papers 2013:26, Lund University, Department of Economics.
    17. Mathias Dewatripont & Patrick Legros, 2005. "Public-private partnerships: contract design and risk transfer," ULB Institutional Repository 2013/175947, ULB -- Universite Libre de Bruxelles.
    18. Elisabetta Iossa & David Martimort, 2011. "The Theory of Incentives Applied to the Transport Sector," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 29, Edward Elgar Publishing.
    19. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2018. "The joy of flying: Efficient airport PPP contracts," Transportation Research Part B: Methodological, Elsevier, vol. 114(C), pages 131-146.
    20. Kirsten Bregn, 2013. "Detrimental Effects of Performance-Related Pay in the Public Sector? On the Need for a Broader Theoretical Perspective," Public Organization Review, Springer, vol. 13(1), pages 21-35, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:11:y:2019:i:24:p:7231-:d:298714. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.