Outsourcing of Public Sevice Provision: When is it more efficient?
Outsourcing to for-profit producers of social services will enable a local government to achieve a given service quality at lower budgetary cost. In the absence of appropriate cost sharing arrangements between the government and the service provider, outsourcing provides an incentive for producers to lower quality in order to reduce costs. The cost reductions per se tend to be efficiency-improving, but to prevent a deterioration of service quality policy makers must spend more resources on monitoring quality. Moreover, the greater effort exerted under private service provision will have to be compensated by higher factor rewards. Hence public in-house provision may be more cost-efficient than outsourcing. This is particularly likely to be the case when the quality of the service is difficult to measure so that marginal monitoring costs are high. The paper shows that these results emerge both when politicians are benevolent and when they distribute rents in exchange for political support. We also show that risk aversion and uncertainty about the potential for cost savings implies a bias against outsourcing. However, if contracts between policy makers and service providers allow appropriate cost sharing arrangements, we find that a version of the Coase Theorem holds: policy makers can then implement exactly the same optimal allocation under public as under private provision.
Volume (Year): 19 (2006)
Issue (Month): 1 (Spring)
|Contact details of provider:|| Web page: http://www.taloustieteellinenyhdistys.fi|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:hrv:faseco:33077889 is not listed on IDEAS
- Morten Bennedsen & Christian Schultz, 2003.
"Outsourcing, Market Structure and Elections,"
CIE Discussion Papers
2003-05, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Bennedsen, Morten & Schultz, Christian, 2003. "Outsourcing, Market Structure and Elections," Working Papers 07-2003, Copenhagen Business School, Department of Economics.
- Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
- Andrei Shleifer, 1998. "State Versus Private Ownership," Harvard Institute of Economic Research Working Papers 1841, Harvard - Institute of Economic Research.
- Andrei Shleifer, 1998. "State Versus Private Ownership," NBER Working Papers 6665, National Bureau of Economic Research, Inc.
- Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:fep:journl:v:19:y:2006:i:1:p:3-15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Editorial Secretary)
If references are entirely missing, you can add them using this form.