Sustainability of Public Services: Is Outsourcing the Answer?

Antonio Sánchez Soliño

doi:10.3390/su11247231

Abstract

The outsourcing of public services has acquired a prominent position in the political agenda of many countries in recent decades. This paper contributes an analysis of the outsourcing of a public service under a theoretical framework based on a multitask principal-agent model. For the management of the service, a contract is assumed that includes certain incentives to the contractor linked to the outcomes in two types of activities: the first related to cost saving, and the second related to the improvement of the quality of the service. The main results of the paper show, in the first place, the conditions under which the outsourcing of a public service is economically unfeasible. Additionally, the paper shows that, under perfect information conditions, the optimal incentives include the contractor retaining all the cost savings. On the contrary, under conditions of asymmetric information on the quality of the service, the contract should stipulate a certain distribution of the cost savings between the public authority and the contractor. More in general, the formalization of the model presented in this work can contribute to a better understanding of the role of the contracts, and therefore to their improvement.

Highlights

The provision of public services, in the context of heavy budget constraints, has been at the center of the political and economic debate in many countries [1]
There is no general rule that ensures the economic viability of outsourcing a given service, since such viability will depend on the level of performance under the public provision of the service
This paper identifies the basic factors that determine the optimal incentives in an outsourcing process

Summary

Introduction

The provision of public services, in the context of heavy budget constraints, has been at the center of the political and economic debate in many countries [1]. While the theoretical approach in most of these papers is based on agency models applied to a contractual relationship, in some cases what was studied were the specific motivations within public organizations It is worth mentioning, for example, the study by Canton [15], who started from the concept of an intrinsic motivation of an agent when performing a given task without any apparent reward other than the actual accomplishment of the task itself. Sustainability 2019, 11, 7231 involved, the difficulties of measuring and monitoring the activities related to the provision of the service, the difficulty in assessing individual evaluation for a task performed by a team, not to mention the presence of intrinsic motivation, as pointed out by Canton [15] These characteristics would largely explain that the development of explicit incentive mechanisms is more limited in public organizations than in private firms, as well as the difficulties encountered for their application in the United Kingdom. Among the most frequent reasons for deciding to outsource, both in the private and in the public sector, this author cites the following: focus on core business, lower costs, lack of competence or experience within the organization itself, quality improvement and flexibility gains

Model Formulation

Results

Discussion

Conclusions