Contracting Out and the Fiscal Sustainability of Public Services

Abstract

This study explores how contracting out can contribute to the fiscal sustainability of public services. Together with the economic advantage that contracting out can lower production costs over government production in house, contracting theory informs that contracting out can offer an insulation of efficient and effective service production from the political incentive problem of the principal. Hypotheses from the perspective are tested over panel data on subnational public service facilities operated via user fees in South Korea. As hypothesized, the analysis results confirm a positive relationship of contracting out with net revenue over government production. While both regionally/municipally owned corporations (R/MOCs) and nonprofits demonstrate their capabilities as competent partners of a government, nonprofits are more effective at the generation of net revenue. The study discusses the implications of contracting out for publicness and a style of governance that actively utilizes the flexibility and expertise of organizations outside a government.