CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES^*

Abstract

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this 'make-or-buy' choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.

Cost versus control: Understanding ownership through outsourcing in hospitals

“…First, nonprofit and for-profit responses to physician-intensity and labor-intensity are distinct. Note how this contrast differs from a comparative static exercise of comparing outsourcing rates across services within an ownership types, as Coles andHesterly (1998), Lopez de Silanes et al (1997), or Levin and Tadelis (2010) do. We can say not only that nonprofits respond to physician-and laborintensity, but also that they respond for reasons distinct from profit motivation.…”

“…Unanticipated contingencies may result in costly renegotiations. Performance must be monitored, and a breach on either side can lead to costly and protracted legal proceedings (Bajari andTadelis 2001, Levin andTadelis 2010). More finely tuned control over the manner of production requires even more completely specified contracts and precise monitoring.…”

“…There is a burgeoning literature on the "boundary of the organization" and how public entities provide services (Hart, Shleifer and Vishny 1997, Lopez de Silanes, Shleifer and Vishny 1997, Nelson 1997, Brown and Potoski 2003, Martimort and Pouyet 2008, David and Chiang 2009, Levin and Tadelis 2010, Iossa and Martimort 2012, but nearly every empirical investigation has focused on one ownership type. These studies cannot address what is essentially "public" or "nonprofit" about choices because they lack a control group of profit maximizers.…”

Putting all One’s Eggs in One Basket: Relational Contracts and the Provision of Local Public Services

“…Recent stylized facts show an increasing involvement of the private sector. For instance, in the U.S., around one third of residential solid waste collection, of solid waste disposal or of street repair are provided through contracts with private firms (Levin and Tadelis [2008]). In Europe, such a contracting out has even more success: to quote the case of French medium-size cities, 63% of them contract out water production and distribution, and 58% delegate sewage (Dexia Crédit Local de France [2006]).…”

“…More broadly, organizational choices in the management of local public services have also been studied by Levin and Tadelis [2008] and Lopez de Silanes et al [1997]. Both studies rely on U.S. data and focus on the determinants of privatization.…”