Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 874: Outsourcing Public Services: Ownership, Competition, Quality and Contracting

Fredrik Andersson () and Henrik Jordahl ()
Additional contact information
Fredrik Andersson: Lund University, Postal: Department of Economics, P.O. Box 7082, S-220 07 Lund, Sweden, ,
Henrik Jordahl: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: We survey the literature on the effects of public sector outsourcing. Guided by theory, we systematically arrange services according to the type and magnitude of their contractibility problems. Taken as a whole, the empirical literature indicates that public sector outsourcing generally reduces costs without hurting quality. This is clearly the case for “perfectly contractible services” like garbage collection, but outsourcing often seems to work reasonably well also for some services with more difficult contracting problems, e.g. fire protection and prisons. Outsourcing seems to be more problematic for credence goods, with residential youth care as the prime example. In contrast to previous reviews, we conclude that ownership and competition appear to be about equally important for the consequences of public sector outsourcing.

Keywords: Outsourcing; Contracts; Tendering; Ownership; Competition; Quality

JEL-codes: D23; H11; L33

36 pages, June 16, 2011

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