Bureaucratic Inefficiency: Failure to Capture the Efficiencies of Outsourcing

Abstract

This paper analyzes the political economy of outsourcing by 16 federal bureaus during 1981-96. In an era of restricted budgets and budget balancing, the paper questions why federal bureaus did not exploit fully the efficiencies of outsourcing. It proves that federal bureaus can achieve technical and cost efficiency through outsourcing when contracts can be nearly fully specified. Federal bureaus outsource by obtaining inputs to their production processes through contracts with competitive market producing units. Econometric results substantiate the hypothesis that 'institutions matter,' and reveal that bureaus achieve varying levels of technical efficiency through different levels of outsourcing.

Keywords: bureaucracy, outsourcing, technical and cost efficiency, econometrics

JEL Classification: D02, D21, H57, H6