Most people agree that, so far, contracting out has only worked in certain service areas and under certain circumstances. Contracting out has become a popular strategy in public service delivery, but it remains uncertain whether and how government can ensure contracting performance. As a result, a growing literature emphasizes the importance of governments' contracting capacities. Yet very few studies have empirically assessed how contracting capacities relate to contracting performance. Th is article identifi es four types of contracting capacities in terms of agenda setting, contract formulation, contract implementation, and contract evaluation, relating them to three performance dimensions including cost, effi ciency, and quality. Drawing from a manager survey from Taiwan, the article shows that the relationships between the capacities and the performance indicators are not always straightforward or linear, and the relationships are complicated by the role of time. Th e results suggest that contracting capacities have both benefi ts and costs, and the solutions rooted in the economics theory should not be taken beyond their appropriate boundaries.