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Outsourcing, Market Structure and Elections

Author

Listed:
  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

We make a positive analysis of the impact of market structure and political preferences on a (local) government's decision to outsource public service using the framework of Hart, Shleifer and Vishny (1997). We argue that although outsourcing is more attractive when the privte market is competitive, the outsourcing decision will be the same in a competitive as in a monopolistic market. Second, we analyze how the price paid in a private monopoly market depends on how much the government cares about the benefits of the public service, and we provide conditions for when a "leftist, public service loving" politician outsources to a lower price. When this is the case and outsourcing is a salient issue in an election, the median voter prefers a more "leftist" government to be in charge of the outsourcing.

Suggested Citation

  • 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.
  • Handle: RePEc:kud:kuieci:2003-05
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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2003-05.pdf/
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    References listed on IDEAS

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    1. repec:hrv:faseco:33077889 is not listed on IDEAS
    2. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics,in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999 Elsevier.
    3. Timothy Besley & Stephen Coate, 1997. "An Economic Model of Representative Democracy," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 85-114.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
    5. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    6. 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.
    7. Florencio López-de-Silanes, 1997. "Determinants of Privatization Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 965-1025.
    8. 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.
    9. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
    10. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-319, March.
    11. Bennedsen, Morten, 1999. "Political Ownership," Working Papers 11-1999, Copenhagen Business School, Department of Economics.
    12. Suzuki, Kenji, 2001. "Marketization of Elderly Care in Sweden," EIJS Working Paper Series 137, Stockholm School of Economics, The European Institute of Japanese Studies.
    13. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720116, January.
    14. repec:hrv:faseco:30727607 is not listed on IDEAS
    15. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 995-1025.
    16. repec:hrv:faseco:30727606 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Andreas Knabe & Peter Birch Sorensen, 2006. "Outsourcing of Public Sevice Provision: When is it more efficient?," Finnish Economic Papers, Finnish Economic Association, vol. 19(1), pages 3-15, Spring.
    2. Bennedsen, Morten & Schultz, Christian, 2003. "Adaptive Contracting," Working Papers 08-2003, Copenhagen Business School, Department of Economics.
    3. 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.

    More about this item

    Keywords

    privatization; outsourcing; incomplete contracts; market power; elections;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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