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

Authors


  • *We thank the Editor and an anonymous referee for helpful guidance. Susan Athey, George Baker, Liran Einav, Robert Gibbons, Avner Greif, Igal Hendel, Paul Milgrom, Luigi Pistaferri, Esteban Rossi-Hansberg, Eric van den Steen and Michael Waldman gave us useful comments on early versions of the paper. City managers Frank Benest, David Boesch, Kevin Duggan and Dave Knapp helped us to understand local governance issues. We received excellent research assistance from Maya Meidan, Marcel Priebsch, Annika Todd, Joanne Yoong, Vineet Bhagwat, Ariel McGinnis, Rizwan Sabar and Kevin Scott. This research has been supported by the National Science Foundation and the Stanford Institute for Economic Policy Research.

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.

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