Outsourcing Local Government Services: Holding Contractors Accountable in Noncompetitive Contract Markets

Abstract

The work of local government administrators is influenced by government’s growing reliance on nongovernmental organizations for service delivery. Yet research suggests that when local governments outsource services, they sometimes confront noncompetitive contractor markets. Under such conditions, they may intervene in order to improve their position in the provider market. We contend that these “market management” activities – strategies used to build, expand, and otherwise strengthen competition – threaten contract accountability and performance because they divert scarce administrative resources from contract oversight. In other words, market management creates opportunity costs by reducing attention to the primary goal of the contract management process – overseeing performance and maintaining contract accountability.

This paper addresses these issues directly by examining the relationships between market competition and opportunity costs. Do market management and noncompetitive markets contribute to opportunity costs? And if so, to what extent do those opportunity costs compromise contract effectiveness? To answer these questions, we use primary data derived from interviews with local government officials and a national survey of local government contract managers. Our results indicate that opportunity costs are higher when competition is weak, and when local officials “manage the market.” We also conclude that contract effectiveness is reduced by those opportunity costs that divert resources away from oversight.

Keywords: contracting, accountability, opportunity costs, managing the market