Cost Saving or Quality Shading? Exploring the Impact of Contracting Out on Organizational Outcomes

Abstract

The question of whether contractors provide better performance than direct public service delivery is critical to public administration theory and practice. While public choice theory expects contractors to offer higher service levels at lower cost, public administration literature largely remains skeptical of these claims. We contribute to this literature by studying the impact of contracting out on a variety of performance dimensions of local public transit industry by employing a two-way fixed-effects regression analysis on panel data of 415 local public transit agencies from 2008 to 2017. The findings suggest that contracting out decreases the effectiveness and quality of public transit services, with very little impact on efficiency and cost recovery. This research contributes to the literature and practice by offering evidence to support the quality shading hypothesis and demonstrating that contracting out can produce undesirable outcomes even in a context that provides clear and measurable performance indicators.