Outsourcing Public Services: Contractibility, Cost, and Quality

Fredrik Andersson,Jens Josephson,Henrik Jordahl

doi:10.1093/cesifo/ifz009

Abstract

AbstractWe review the literature on public sector outsourcing to explore if the theoretical predictions from the incomplete contracts literature hold up to recent empirical evidence. Guided by theory, we arrange services according to the type and magnitude of their contractibility problems. The empirical studies point at rather favourable outsourcing outcomes, in terms of costs and quality, for services without severe contracting problems. The picture is more mixed for services with tougher contracting problems, with the weight of the evidence in favour of public provision. This difference between services is largely in line with the property-rights framework and theories of incomplete contracts.

Highlights

The cost of government production has been increasing for at least a decade and amounted to 23 percent of GDP in the average OECD country in 2016
Either in the form of expenditures on goods and services used by government or expenditures on goods and services financed by government, amounted to 9.5 percent of GDP across OECD countries in 2016, with the highest shares (13–16 percent) in Finland, Germany, and the Netherlands, see Fig. 1 (OECD, 2018)
The structure of government production raises the question of how outsourcing influences the cost and quality of public services

Summary

Introduction

The cost of government production has been increasing for at least a decade and amounted to 23 percent of GDP in the average OECD country in 2016. Compensation to government employees made up the largest part of the cost and outsourcing has been an alluring option to keep public expenditures in check. Either in the form of expenditures on goods and services used by government or expenditures on goods and services financed by government, amounted to 9.5 percent of GDP across OECD countries in 2016, with the highest shares (13–16 percent) in Finland, Germany, and the Netherlands, see Fig. 1 (OECD, 2018).

Used by government Financed by government

Norway Poland Portugal Slovak Republic Slovenia

Very highf Very highg

Findings

Conclusion