Contracting out: making it work

Abstract

Performance of contracting as a policy tool has been less than expected. This can mainly be attributed to the fact that for a contract to be effective, it requires meeting many conditions, some of which can be challenging and not always feasible. To work effectively, contracting requires suitable context, an appropriate contract design, and effective contract management such that the parties engage in consummate behavior rather than perfunctory or predatory behavior. This paper identifies the critical conditions required for effective contracting and demonstrates the challenge in meeting them, using the case of National Health Insurance in India. The paper specifically discusses the role that contract management can play in effective contracting, a point that has received little attention, but could be tweaked easily leading to significant impact on contract performance. The paper also provides some suggestions for meeting the challenge of effective contracting.