Institutional Choices for Local Service Contracting and Collaboration

Abstract

Outsourcing local services necessitates collaborative relationships, yet we know little about local service delivery mechanism choices that formalize these relationships. Alternatives to in-house production include contracts with for-profit organizations, provision by local authorities, and intergovernmental agreements. Previous studies of service choices focus on potential “efficiency gains” from external exchange, especially the economic costs on the supplier’s side resulting from market failure or asset specificities. This study instead applies the political market framework to examine how collaborative local service arrangements are shaped by or respond to supply and demand characteristics. The empirical analysis estimates, logit and multinomial probit models of public service delivery in Georgia. Ferris and Graddy (1986) suggest that decisions reflect a two-step process, i.e., choosing whether or not to contract out and then choosing with whom to contract. This paper also follows their two-step approach. Each local government decides whether or not to collaborate (logit model) and then chooses with whom to collaborate (multinomial probit model). The findings indicate that the transaction cost of supply and demand factors defined by the political market framework affect the choices of collaborative arrangements and alternative service delivery mechanisms.