Social services outsourcing to the non-profit sector: Economic analysis

Abstract

Drivers and factors of social service outsourcing to non-profits are identified and discussed. A key point of the discussion of the choice between for-profits and non-profits as outsourcing partners is whether the quality of the service is observable and verifiable by third parties. In the case of unobservable/ unverifiable quality, market incentives could be misaligned with social welfare, and non-profits gain an advantage over for-profits. Cross-country analysis reveals factors explaining variations in non-profit outsourcing. All else equal, more outsourcing is observed among nations with efficient public sector governance and strong civil society. A theory is presented to compare cost, quality and social welfare between contracting-out to for-profits and non-profits. Theory findings and predictions are illustrated by the case of outsourcing of long-term care to for-profits and non-profits, using recent evidence from the COVID-19 pandemic.