Shaping the Provision of Outsourced Public Services

Abstract

Local governments that contract out services are faced with a complex problem of developing an appropriate mix of incentives to elicit performance from a diverse set of service providers, including networks of other local governments, mission-driven nonprofit organizations, and profit-maximizing firms. This paper employs agency and stewardship theory to motivate an analysis of rewards and sanctions used in service delivery relationships. Our findings, consistent with principal-agent theory, indicate that a significant proportion of local governments in our sample employ high-powered incentives with for-profit firms. It is interesting to note, however, that governments with short-term relationships with for-profit firms do not utilize high-powered incentives. These incentives are found in longer duration contracts. In line with the predictions of stewardship theory, governments in our sample do not use high-powered incentives with other governments or nonprofit service providers. Low-powered incentives, primarily informal discussions with those providers, constitute the primary means by which the contracting government ensures that the necessary adjustments to service delivery are made. The efficacy of informal discussion with nonprofits and other governments diminished significantly with longer term contracts, leaving contracting governments with few tools to influence the behavior of their contracting partners. Trust, value congruence, and mission compatibility can explain the initiation of relationships with nonprofits and other governments but do not yet inform government officials about how such relationships can be maintained and enhanced.

Keywords:

• agency
• incentives
• monitoring
• outsourcing
• stewardship