Contracting out: exporting lessons for Chinese governance

Market-based reforms such as contracting out or public private partnerships are becoming more common in the public sector across the globe. In particular, reform-minded proposals like contracting out or public private partnerships are gaining momentum in Chinese governance. These reforms are intended to increase efficiency in government decisions, while dealing with scarce fiscal conditions. That said, other factors including democratic practices, political ideology, or the institutional features of government also shape and explain why certain reforms are adopted and practiced. To disentangle what drives government’s ‘make-or-buy’ decisions, we use local US government data to determine the extent to which efficiency concerns drove the adoption of contracting out, compared with other relevant factors. Our findings suggest that the adoption of contracting out is not consistently based on increasing the efficiency of government. A robust and competitive market does increase the use of contracting out, whereas political factors do not appear to be a driving concern. In addition, a local government’s financial well-being plays a critical role in determining the use of outsourcing. Generally speaking, local communities that face financial hardship tend to contract out more municipal services. Lastly, although the empirical study is based on the U.S. context, it sheds lights on a number of policy implications that are useful for Chinese governance.