Contracting or Public Delivery? The Importance of Service, Market, and Management Characteristics

TLDR

Analysis of local government contracting decisions typically focuses on transaction costs related to service characteristics, especially asset specificity and difficulty of contract management. A 2007 survey of US city managers’ rankings of 67 services by transaction costs, competition, and citizen interest was combined with a national survey of city managers’ sourcing decisions to model service delivery sourcing choices. The study finds that metro status and competition are the most important determinants of service delivery sourcing, with intergovernmental cooperation favored when contract management is difficult and competition is low, profit contracting less common when citizen interest is high and competition low, and professional managers more effective at addressing broader transaction costs.

Abstract

Analysis of local government contracting decisions typically focuses on transactions costs related to service characteristics, especially asset specificity and difficulty of contract management. This analysis expands the focus to include market characteristics (competition), citizen characteristics (public interest in the service delivery process), and place characteristics (metro status and public management) and finds these are the more important factors. A 2007 survey of US city managers' rankings of 67 services by transactions costs, competition, and citizen interest is combined with a 2007 national survey of city managers' sourcing decisions (direct public, intergovernment cooperation, for-profit and nonprofit contracting). Multinomial logit models of service delivery sourcing choice find that metro status and competition are key explanatory variables. Intergovernmental cooperation represents an important public market alternative when contract management is difficult and competition is low. For profit contracting is less common when citizen interest is high and competition is low. Governments with professional managers appear more effective in addressing these broader transactions costs of citizen interests, political and labor opposition, and market management.