Organizational Choices for Public Service Supply

This article investigates the nature of the service production choice of local governments. The incentives and constraints embedded in different organizational forms--public, nonprofit, and for-profit organizations--have implications for both production and transaction costs of various production options. Based on a national sample of local governments providing health services, choices among internal public production, external public production, nonprofit, and for-profit production are examined. A nested logit model is utilized to examine the impact of production and transaction costs of alternatives, the number of producers of each alternative, and the characteristics of the jurisdiction that determine the importance of production and transaction costs characteristic to the jurisdiction. The empirical results indicate that the public organization choices (internal and external) have unobserved components of utility in common, as do the private organizational choices (nonprofit and for-profit). This suggests that decisionmakers recognize the public-private distinction in their supply decisions. Copyright 1994 by Oxford University Press.