The determinants of the choice between public and private production of a publicly funded service

Abstract

The public choice literature contains little formal analysis of the bureaucratic choice of production modes -public or private -of publicly funded services. An important question to be addressed is why some governmental bodies choose to provide a publicly funded service with publicly owned and operated production units whereas other governmental bodies contract with private firms to provide the same publicly funded service. This paper is the first formal attempt to remedy this gap in the literature. We develop a theoretical explanation of the government decision maker's choice between public and private production modes based on utility maximizing behavior. We then examine empirically this choice employing logit analysis. The empirical results, which include several tests for robustness, confirm our theoretical explanation. The results are significant and suggest that non-monetary constraints are an important factor affecting this choice of production modes and that monetary constraints are less influential.A large literature has developed over the last two decades comparing the performance of public sector (or more generally, not-for-profit) economic activity with that of the private sector. Industries investigated in this literature include airline service, electric and water utilities, railroads, refuse collection, and school bus transportation. The hypothesis underlying these investigations is that private firms are more efficient by market standards because the rewards and costs of operation reside with the owners of resources involved in production to a greater degree than is the case for

Governing Diversity: The Impact of Social Heterogeneity on Human Service Delivery

“…Generally, because of the potential harm that contracting-out brings to government employees (such as job security, work conditions, and wage and benefits), public employee unions are always treated as major opponents of government contracting (Fernandez and Smith 2006). However, there is also some literature arguing that the existence of strong unions would push service provision out, because public administrators would like to get rid of political bargains with unions and increased in-house production costs resulted from unions' rent-seeking activities (Ferris 1986;McGuire et al 1987). The finding here support the latter argument.…”

One more ride on the merry-go-round! Public ownership and delayed competition in local public services

“…First, local privatization and outsourcing have been placed in relation to fiscal stress by public choice theorists. They consider public delivery in the absence of competition as the ideal context for self-interested politicians who are eager to win electoral support and reciprocate by sustaining inefficient government jobs (Lopez-de-Silanes et al, 1997;McGuire et al, 1987). Accordingly, fiscal stress is viewed as a beneficial condition that makes this interaction unsustainable.…”

Implementing Regulatory Reforms in Multi-Level Governance Systems: The Case of the Reform of the Water Sector in Italy (1994-2006)

“…Gómez Ibáňez (2003), for example, widely discusses four main regulatory "models", namely public ownership, franchise allocation, discretionary regulation, and private ownership in conjunction with liberalisation and regulation of access, prices, and quality. Why public authorities adopt any particular regulatory model and what are the relative strengths and weaknesses of alternative regulatory systems have been largely examined by several works (Amato and Conti, 2005;Baumol, 1982;Beecher, 2001;Bishop and Walker, 1999;Christoffersen and Paldam, 2003;Demsetz, 1968;Ferris, 1986;Ferris and Graddy, 1988;Finger and Allouche, 2003;Groom et al, 2006;Warner, 2004, 2007;Hirsch, 1995;Kay and Thompson, 1986;Littlechild, 1986;Lobina and Hall, 2003;Massarutto, 2007;McGuire et al, 1987;Megginson and Netter, 2002;Merrett, 1997;Miranda, 1994;Ogus, 1994;Rees, 1998;Schmalensee, 1979;Tenbüken, 2006;Vickers and Yarrow, 1998;Warner and Hebdon, 2001;Williamson, 1976). Some authors hold that there may be no single "best way" to regulate infrastructure (Glachant, 2002;Goldberg, 1976), while others argue that the design of regulatory systems should follow "standard prescriptions" (Joskow, 1996(Joskow, , 1997 that suggest that the potentially competitive activities in infrastructure industries should be disentangled (unbundled) from those characterised by natural monopoly conditions and that regulations should be tailored in order to facilitate competition in the former activities to restrain rent-seeking behaviour in the latter ones.…”