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Contracting Out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia

Author

Listed:
  • Banerjee, Abhijit

    (MIT)

  • Hanna, Rema

    (Harvard University)

  • Kyle, Jordan C.

    (International Food Policy Research Institute)

  • Olken, Benjamin A.

    (MIT)

  • Sumarto, Sudarno

    (National Team for the Acceleration of Poverty Reduction, Jakarta)

Abstract

Outsourcing government service provision to private firms can improve efficiency and reduce rents, but there are risks that non-contractible quality will decline and that reform could be blocked by vested interests exactly where potential gains are greatest. We examine these issues by conducting a randomized field experiment in 572 Indonesian localities in which a procurement process was introduced that allowed citizens to bid to take over the implementation of a subsidized rice distribution program. This led 17 percent of treated locations to switch distributors. Introducing the possibility of outsourcing led to a 4.6 percent reduction in the markup paid by households. Quality did not suffer and, if anything, households reported the quality of the rice improved. Bidding committees may have avoided quality problems by choosing bidders who had relevant experience as traders, even if they proposed slightly higher prices. Mandating higher levels of competition by encouraging additional bidders further reduced prices. We document offsetting effects of having high rents at baseline: when the initial price charged was high and when baseline satisfaction levels were low, entry was higher and committees were more likely to replace the status quo distributor; but, incumbents measured to be more dishonest on an experimental measure of cheating were also more likely to block the outsourcing process. We find no effect on price or quality of providing information about program functioning without the opportunity to privatize, implying that the observed effect was not solely due to increased transparency. On net, the results suggest that contracting out has the potential to improve performance, though the magnitude of the effects may be partially muted due to push back from powerful elites.

Suggested Citation

  • Banerjee, Abhijit & Hanna, Rema & Kyle, Jordan C. & Olken, Benjamin A. & Sumarto, Sudarno, 2016. "Contracting Out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia," Working Paper Series 16-001, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:16-001
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    Cited by:

    1. Dhaliwal, Iqbal & Hanna, Rema, 2017. "The devil is in the details: The successes and limitations of bureaucratic reform in India," Journal of Development Economics, Elsevier, vol. 124(C), pages 1-21.
    2. Patrice Ollivaud, 2017. "Improving the allocation and efficiency of public spending in Indonesia," OECD Economics Department Working Papers 1381, OECD Publishing.
    3. Lin, J. & Z. & Zhang, Z., 2018. "Does transportation matter to tobacco leaf producers? Evidence from Guizhou, China," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 276998, International Association of Agricultural Economists.

    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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