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Despite the growing role that contracts with nonprofits play in local service delivery, only limited attention has been directed to why some cities rely more on nonprofit organizations to produce services or how political institutions influence the role nonprofits play in service delivery. To investigate these issues, the authors present a transaction cost explanation that focuses on how political system characteristics and structures of service markets shape the costs of negotiating, monitoring, and enforcing contracts for local governments. The findings indicate that forms of government, mayoral turnover, racial segregation, and the market of nonprofit producers influence the role of nonprofits in delivering elder services, but decisions to contract exclusively with nonprofits are subject to different influences than decisions to jointly produce service with a nonprofit organization.