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Contracting Out Public Service Provision to Non-for-profit Firms

  • John Bennett


  • Elisabetta Iossa


We analyze the contracting out of public service provision to private firms and compare the performance of for-profit and non-for-profit firms. We consider two alternative settings.In the first,the firm has control rights, as under the UK's Private Finance Initiative(PFI). In the second,the goverment retains control rights,as under traditional procurement. The main insights of the paper can be summarized as follows. First, even when an NP cares more than an Fp does about social benefits,it does not follows that provision by an NP yields the higher social benefits.This is because the non-distribution constraint in of an NP may work against its incentives to invest.Second, the new procurement strategy of PFI increases the desirability of NP provision,relative to traditional procurement.Third, a crucial role in determing the desirability of NP provision is played bu the correlation between the effect of investment onsocial benefit and profit and the nature od the firm's investment.

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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 04-12.

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Length: 26 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:bru:bruppp:04-12
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
  2. Bos, Dieter & De Fraja, Gianni, 2002. "Quality and outside capacity in the provision of health services," Journal of Public Economics, Elsevier, vol. 84(2), pages 199-218, May.
  3. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
  4. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  5. Bilodeau, Marc & Slivinski, Al, 1996. "Volunteering nonprofit entrepreneurial services," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 117-127, October.
  6. John Bennett & Elisabetta Iossa, 2004. "Contracting Out Public Service Provision to Non-for-profit Firms," Public Policy Discussion Papers 04-12, Economics and Finance Section, School of Social Sciences, Brunel University.
  7. Timothy Besley & Maitreesh Ghatak, 2001. "Government Versus Private Ownership Of Public Goods," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1343-1372, November.
  8. Oliver Hart, 2002. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," The Centre for Market and Public Organisation 02/061, Department of Economics, University of Bristol, UK.
  9. Bennett, John & Iossa, Elisabetta, 2006. "Building and managing facilities for public services," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2143-2160, November.
  10. Burton A. Weisbrod, 1997. "The future of the nonprofit sector: Its entwining with private enterprise and government," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(4), pages 541-555.
  11. Hart, Oliver & Shleifer, Andrei & Vishny, Robert W, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1127-61, November.
  12. Patrick W. Schmitz, 2000. "Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 394-411, August.
  13. 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.
  14. Susan Rose-Ackerman, 1996. "Altruism, Nonprofits, and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 701-728, June.
  15. John Bennett & Elisabetta Iossa & Gabriella Legrenzi, 2003. "The Role of Commercial Non-profit Organizations in the Provision of Public Services," Oxford Review of Economic Policy, Oxford University Press, vol. 19(2), pages 335-347, Summer.
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