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Outsourcing of Public Service Provision: When is it More Efficient?

Author

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  • Peter Birch Sørensen

    (Institute of Economics, University of Copenhagen)

Abstract

We set up a model of public service provision to study the factors determining whether outsourcing to for-profit and not-for-profit producers of social services will enable a local government to achieve a given service quality at lower budgetary cost. 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.

Suggested Citation

  • Peter Birch Sørensen, 2004. "Outsourcing of Public Service Provision: When is it More Efficient?," EPRU Working Paper Series 04-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:04-06
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    File URL: http://www.econ.ku.dk/epru/files/wp/wp-04-06.pdf
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    References listed on IDEAS

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    1. repec:hrv:faseco:33077889 is not listed on IDEAS
    2. 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.
    3. 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, January.
    4. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
    5. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    6. repec:hrv:faseco:33078971 is not listed on IDEAS
    7. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    8. Jens Lundsgaard, 2002. "Competition and Efficiency in Publicly Funded Services," OECD Economics Department Working Papers 331, OECD Publishing.
    9. repec:hrv:faseco:30727607 is not listed on IDEAS
    10. 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)

    More about this item

    Keywords

    outsourcing; public goods provision; public sector reform;

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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