Contracting Out Parks and Recreation Services: Correcting for Selection Bias Using a Heckman Selection Model

Abstract

Despite the growing scholarly attention on the efficiency rationale of contracting out, the empirical evidence to support claims that contracting out service delivery reduces service costs has not been forthcoming. Using transaction cost theories, this research explores park and recreation service provision costs across contractor sectors, controlling for the choice to contract out a service or not. The two-stage Heckman model indicates the importance of competitive markets and economies of scale in reducing transaction cost risk which local governments must face. This research also addresses how state and local institutional settings define the context in which policy decisions are made and implemented.

Keywords:

• contracting out
• cost efficiency
• Heckman selection model
• transaction cost

Notes

*An earlier version of this article was presented at the Midwest Political Science Association National Annual Conference, Chicago. April 15–18, 2004. Thanks to Richard C. Feiock who co-wrote that paper and commented on this one. This research was supported in part by a grant from the Aspen Institute Nonprofit Sector Research Fund.

^a Some of local governments contract out their services to the multiple sector providers, thus Table 1 does not provide percentage information.

^b ICMA survey category includes Franchises/concessions, Subsidies, and Volunteers. Those are not included in this analysis.

*p < .10.

**p < .05.

***p < .001.

*p < .05, **p < .01, ***p < .001.

*p < .05, **p < .01, ***p < .001.

Stein, 1990.

Williamson, 1981.

Previous researches on local contracting out tried to measure the markets for service delivery of by location of metropolitan area. It assumes metropolitan areas have a number of private and nonprofit vendors which can potentially provide scale economies. See DeHoog, R. H. Contracting Out for Human Services: Economic, Political and Organizational Perspectives; SUNY Press: Albany, 1984; Stein, 1990; Ferris, J.; Graddy, E. Contracting Out: For What? With Whom? Public Administration Review 1986, 46, 343–354; Ferris and Graddy, 1988.

Stein, 1990.

Ferris and Graddy, 1986.

Stein, 1990.

See Weisbrod, Burton Allen. Toward a Theory of the Voluntary Nonprofit Sector in a Three Sector Economy. In Altruism, Morality, and Economic Theory; Phelps, Edmund S., Ed.; Russell Sage Foundation: New York, 1975; Weisbrod, B. A. The Future of the Nonprofit Sector: Its Entwining with Private Enterprise and Government. Journal of Policy Analysis and Management 1997, 16 (4), 541–555. Young, Dennis R. Government Failure Theory. In The Nature of the Nonprofit Sector; Ott, J. Steven, Ed.; Westview Press: Boulder, CO, 2001.

Weisbrod, 1997.

Weisbrod (1975) points out that when public and private service provision fail to satisfy the needs of citizen, nonprofit organizations can fill the gap for providing public service on a private, voluntary basis.

See Brennan, G.; Buchanan, J. The Power to Tax; Cambridge University Press: Cambridge, 1980; Ostrom, 1990; O'Toole, Laurence J. Jr. American Intergovernmental Relations: An Overview. In American Intergovernmental Relations: Foundations, Perspective and Issues; O'Toole, Laurence J. Jr., Ed. CQ Press: Washington D. C.: 1993; Feiock, R. C.; McCabe, B. State Rules and City Money; Cambridge; Lincoln Institute for Land Policy Working Paper Series, 2001.

Brennan and Buchanan, 1980; Ostrom, 1990.

Ostrom, 1990; 52.

As Ostrom (1990) clarified, “Institutions can be defined as the sets of working rules that are used to determine who is eligible to make decisions in some area, what actions are allowed or constrained, what aggregation rules will be used, what procedures must be followed.” (p. 51)

See Burns, N.; Gamm, G. Creatures of the State: State Politics and Local Government, 1871–1921. Urban Affairs Review 1997, 33 (1), 59–96; Ross, B.; Levine, M. A. Urban Politics: Power in Metropolitan America; Peacock Publishers, Inc: Itasca, IL, 2001.

Stein, 1990.

Stein, 1990.

Ferris and Graddy, 1986; Morgan, D. R.; Hirlinger, M. W.; England, R. E. The Decision to Contract Out City Services: A Further Explanation. Western Political Quarterly 1988, 41, 362–372.

Feiock, R. C.; Kim, J. Form of Government, Administrative Organization, and Local Economic Development Policy. Journal of Public Administration Research and Theory 2001, 11 (Jan), 29–49; Feiock and Clingermayor, 2001.

Stein, 1990; Feiock and Clingermayor, 2001.

Ferris and Graddy, 1988.

See Heckman, J. Sample Selection Bias as a Specification Error. Econometrica 1979, 47, 153–161; also see Breen, R. Regression Models: Censored, Sample Selected or Truncated Data; Sage Publications: Thousand Oaks, CA, 1996.

Breen, 1996.

Following the rule that the number of dummies should be one less than the number of categories of the variable. Gujarati, D.N. Basic Econometrics; McGraw-Hill: New York, 1995.

If rho is not zero value, there is a correlation between the error terms of selection equation and outcome equation. When we reject the Ho, the results of regression model are biased and we should use those from the Heckman selection model.

Stein, 1990.

For the measurement of potential private vendors of each service area in this article we employ the service categories of County Business Patterns (CBP) 1997 from the US Census Bureau. CBP is an annual series that provides subnational economic data by industry which covers most of the country's economic activity. Parks—CBP 71219 National parks and other similar institutions, Recreations—71394 Fitness and recreational sports centers.

Bickers found the potential strength of nonprofit organization as service providers is not the raw number of the organizations in the municipality, it is more likely to be measured as the amount of resources that they have for carrying out services. See Bickers K. “Social Welfare Provision in American Communities: The Role of Nonprofit Organizations.” Presented at the Workshop in Political Theory and Policy Analysis, University of Indiana, Bloomington, October 5, 1998.

For the measurement of potential nonprofit vendors of each service area in this research we employ the service categories of the National Taxonomy of Exempt Entities (NTEE), which offers a definitive classification system for nonprofit organizations recognized as tax exempt under the Internal Revenue Code: Parks—NTEE P30 Human services for children and youth, Recreations—NTEE P30 Human services for children and youth.

Feiock R. C.; Jang, H. S. Fiscal Implications of Contracting Out Local Services: A Heckman Selection Approach, National Public Management Research Conference, Washington D.C., October, 2003.

Ferris and Graddy, 1988.

Stein, 1990.

Feiock and Clingermayor, 2001; Ferris and Graddy, 1986; 1988.