Contracting Out Public Service Provision to Non-for-profit Firms

We analyze the contracting out of public service provision to private firms and compare the performance of for-profit and non-for-profit firms. We consider two alternative settings.In the first,the firm has control rights, as under the UK's Private Finance Initiative(PFI). In the second,the goverment retains control rights,as under traditional procurement. The main insights of the paper can be summarized as follows. First, even when an NP cares more than an Fp does about social benefits,it does not follows that provision by an NP yields the higher social benefits.This is because the non-distribution constraint in of an NP may work against its incentives to invest.Second, the new procurement strategy of PFI increases the desirability of NP provision,relative to traditional procurement.Third, a crucial role in determing the desirability of NP provision is played bu the correlation between the effect of investment onsocial benefit and profit and the nature od the firm's investment.