Contracting Out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia

48 Pages Posted: 5 Jan 2016

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Rema Hanna

Harvard University - Harvard Kennedy School (HKS)

Jordan Kyle

Columbia University

Benjamin A. Olken

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Society of Fellows

Sudarno Sumarto

SMERU Research Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 4, 2016

Abstract

Outsourcing government service provision to private firms can improve efficiency and reduce rents, but there are risks that non-contractible quality will decline and that reform could be blocked by vested interests exactly where potential gains are greatest. We examine these issues by conducting a randomized field experiment in 572 Indonesian localities in which a procurement process was introduced that allowed citizens to bid to take over the implementation of a subsidized rice distribution program. This led 17 percent of treated locations to switch distributors. Introducing the possibility of outsourcing led to a 4.6 percent reduction in the markup paid by households. Quality did not suffer and, if anything, households reported the quality of the rice improved. Bidding committees may have avoided quality problems by choosing bidders who had relevant experience as traders, even if they proposed slightly higher prices. Mandating higher levels of competition by encouraging additional bidders further reduced prices. We document offsetting effects of having high rents at baseline: when the initial price charged was high and when baseline satisfaction levels were low, entry was higher and committees were more likely to replace the status quo distributor; but, incumbents measured to be more dishonest on an experimental measure of cheating were also more likely to block the outsourcing process. We find no effect on price or quality of providing information about program functioning without the opportunity to privatize, implying that the observed effect was not solely due to increased transparency. On net, the results suggest that contracting out has the potential to improve performance, though the magnitude of the effects may be partially muted due to push back from powerful elites.

Keywords: Food Subsidy, Indonesia, Social Policy, Outsourcing, Food Programs

Suggested Citation

Banerjee, Abhijit V. and Hanna, Rema and Kyle, Jordan and Olken, Benjamin A. and Sumarto, Sudarno, Contracting Out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia (January 4, 2016). HKS Working Paper No. RWP16-001. Available at SSRN: https://ssrn.com/abstract=2710881 or http://dx.doi.org/10.2139/ssrn.2710881

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-252D
Cambridge, MA 02142
United States
617-253-8855 (Phone)
617-253-6915 (Fax)

Rema Hanna (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Jordan Kyle

Columbia University ( email )

Benjamin A. Olken

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States
617-253-6833 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-588-1407 (Phone)

Harvard University - Society of Fellows

Cambridge, MA 02138
United States

Sudarno Sumarto

SMERU Research Institute ( email )

Jl. Tulung Agung No. 46
Jakarta, 10310
Indonesia

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