IDEAS home Printed from https://ideas.repec.org/a/fep/journl/v19y2006i1p3-15.html
   My bibliography  Save this article

Outsourcing of Public Sevice Provision: When is it more efficient?

Author

Listed:
  • Andreas Knabe

    (Otto-von-Guericke-University Magdeburg)

  • Peter Birch Sorensen

    (Department of Economics, University of Copenhagen, Denmark)

Abstract

Outsourcing to for-profit producers of social services will enable a local government to achieve a given service quality at lower budgetary cost. In the absence of appropriate cost sharing arrangements between the government and the service provider, 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. However, if contracts between policy makers and service providers allow appropriate cost sharing arrangements, we find that a version of the Coase Theorem holds: policy makers can then implement exactly the same optimal allocation under public as under private provision.

Suggested Citation

  • 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.
  • Handle: RePEc:fep:journl:v:19:y:2006:i:1:p:3-15
    as

    Download full text from publisher

    File URL: http://www.taloustieteellinenyhdistys.fi/images/stories/fep/fep12006_knabe.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    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. 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.
    4. Eero Lehto, 2005. "On Publicly Provided Services – Public or Private Production?," Working Papers 211, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peter Birch Sørensen, 2015. "Reforming Public Service Provision: What have we learned?," EPRU Working Paper Series 2015-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Ullah, Barkat, 2021. "Does innovation explain the performance gap between privatized and private firms?," Journal of Economics and Business, Elsevier, vol. 113(C).
    3. Orietta DESSY & Massimo FLORIO, 2004. "Workers' earnings in the UK before and after privatisation: a study of five industries," Departmental Working Papers 2004-13, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. Qi Quan & N. Huyghebaert, 2004. "Privatization. Issues at Stake in the Case of China," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 647-687.
    5. O'Toole, Conor M. & Morgenroth, Edgar L.W. & Ha, Thuy T., 2016. "Investment efficiency, state-owned enterprises and privatisation: Evidence from Viet Nam in Transition," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 93-108.
    6. Gasperin, Simone, 2022. "Lessons from the past for 21st century systems of state-owned enterprises: The case of Italy's IRI in the 1930s," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 599-612.
    7. Paul H. Jensen & Robin E. Stonecash, 2004. "The Efficiency of Public Sector Outsourcing Contracts: A Literature Review," Melbourne Institute Working Paper Series wp2004n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    8. Pierre M. Picard & Ridwan D. Rusli, 2012. "State Owned Firms: Private Debt, Cost Revelation and Welfare," DEM Discussion Paper Series 12-10, Department of Economics at the University of Luxembourg.
    9. Richard W. Carney & Travers Barclay Child, 2015. "Business Networks and Crisis Performance: Professional, Political, and Family Ties," Tinbergen Institute Discussion Papers 15-135/V, Tinbergen Institute, revised 20 Feb 2015.
    10. Borisova, Ginka & Fotak, Veljko & Holland, Kateryna & Megginson, William L., 2015. "Government ownership and the cost of debt: Evidence from government investments in publicly traded firms," Journal of Financial Economics, Elsevier, vol. 118(1), pages 168-191.
    11. Wu, Aihua, 2017. "The signal effect of Government R&D Subsidies in China: Does ownership matter?," Technological Forecasting and Social Change, Elsevier, vol. 117(C), pages 339-345.
    12. Asaftei, Gabriel & Parmeter, Christopher F., 2010. "Market power, EU integration and privatization: The case of Romania," Journal of Comparative Economics, Elsevier, vol. 38(3), pages 340-356, September.
    13. Alberto Cavaliere & Simona Scabrosetti, 2008. "Privatization And Efficiency: From Principals And Agents To Political Economy," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 685-710, September.
    14. Blaeschke, Frédéric & Haug, Peter, 2014. "Does Intermunicipal Cooperation Increase Efficiency? Evidence from the Hessian Wastewater Sector," IWH Discussion Papers 11/2014, Halle Institute for Economic Research (IWH).
    15. Dastidar, Siddhartha G. & Fisman, Raymond & Khanna, Tarun, 2008. "Testing limits to policy reversal: Evidence from Indian privatizations," Journal of Financial Economics, Elsevier, vol. 89(3), pages 513-526, September.
    16. Sergei Guriev & William Megginson, 2006. "Privatization: What We have Learned," Post-Print hal-03459145, HAL.
    17. Tina Søreide & Kjetil Bjorvatn, 2003. "Corruption and market reform," CMI Working Papers WP 2003:7, CMI (Chr. Michelsen Institute), Bergen, Norway.
    18. Xie, Sujuan & Lin, Bingxuan & Li, Jingjing, 2022. "Political Control, Corporate Governance and Firm Value: The Case of China," Journal of Corporate Finance, Elsevier, vol. 72(C).
    19. Narjess Boubakri & Jean-Claude Cosset & Nassima Debab & Pascale Valéry, 2011. "Privatization and Globalization: an Empirical Analysis," Cahiers de recherche 1130, CIRPEE.
    20. Ádám Szentpéteri & Álmos Telegdy, 2010. "Political Selection Of Firms Into Privatization Programs. Evidence From Romanian Comprehensive Data," Economics and Politics, Wiley Blackwell, vol. 22(3), pages 298-328, November.

    More about this item

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fep:journl:v:19:y:2006:i:1:p:3-15. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Editorial Secretary (email available below). General contact details of provider: https://edirc.repec.org/data/talouea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.