Contracting Out and the Fiscal Sustainability of Public Services

Abstract

This study explores how contracting out can contribute to the fiscal sustainability of public services. Together with the economic advantage that contracting out can lower production costs over government production in house, contracting theory informs that contracting out can offer an insulation of efficient and effective service production from the political incentive problem of the principal. Hypotheses from the perspective are tested over panel data on subnational public service facilities operated via user fees in South Korea. As hypothesized, the analysis results confirm a positive relationship of contracting out with net revenue over government production. While both regionally/municipally owned corporations (R/MOCs) and nonprofits demonstrate their capabilities as competent partners of a government, nonprofits are more effective at the generation of net revenue. The study discusses the implications of contracting out for publicness and a style of governance that actively utilizes the flexibility and expertise of organizations outside a government.

Keywords:

• Contracting out
• fiscal sustainability
• nonprofits
• political incentive problem of the principal
• publicness

Notes

1 Korean Ministry of the Interior and Safety. (Each year). The operations of public service facilities.

2 Retrieved from https://www.law.go.kr.

3 https://blog.stata.com/2015/10/29/fixed-effects-or-random-effects-the-mundlak-approach/. Accessed Aug 7, 2022.

4 Correlations table and yearly summary statistics table available upon request.

5 Results table available upon request.

6 Results table available upon request.

7 Results table available upon request.

8 Results table available upon request.

9 Gangnam-gu municipal government in the Seoul metropolitan area. Ordinance No. 1700 Regarding the Creation and Operation of Youth Facilities. (2022, May 6). Appendix #2. Retrieved from https://law.go.kr.

10 Public service facilities swallowing taxpayers’ 1,000,000,000 KRW every year… (2020, August 2). Segye Daily. Retrieved from https://www.segye.com/newsView/20200729520685; Subnational public service facilities, service users cut in half with employees grown… 1,200,000,000,000 KRW in deficit. (2021, December 29). Dong-A Daily. Retrieved from https://www.donga.com/news/Politics/article/all/20211229/110998040/1.

Additional information

Notes on contributors

Cheong Kim

Cheong Kim is a research scholar in the School of Public Service at Boise State University. His areas of research include contract management, local government management, and public budgeting. His work is found in journals such as International Journal of Public Administration, Social Science Journal, and Public Budgeting & Finance.

Taehyon Choi

Taehyon Choi is professor of public administration in the Graduate School of Public Administration at Seoul National University. His current research interests are organizational and policy learning, collaborative governance, and public ethics. His articles appear in journals such as Journal of Public Administration Research and Theory, Public Administration Review, and Government Information Quarterly.