Incentives and the Efficiency of Public Sector-Outsourcing Contracts

40 Pages Posted: 22 Dec 2005

See all articles by Paul H. Jensen

Paul H. Jensen

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Robin E. Stonecash

Australian Graduate School of Management

Abstract

Outsourcing the provision of traditionally publicly provided services has become commonplace in most industrialized nations. Despite its prevalence, there still is no consensus in the academic literature on the magnitude (and determinants) of expected cost savings to the government, nor the sources of those savings. This article considers the arguments for (and against) outsourcing and then examines the empirical evidence pertaining to whether any observed savings occur and whether they persist over time. In addition, we examine the existing evidence for the 'redistribution hypothesis' and the 'quality-shading hypothesis', which critics have used to argue that outsourcing lowers government expenditure by lowering wages and conditions and/or lower quality services. Finally, we consider the impact of contract design on outsourcing outcomes. While the power of incentives is a strong theme in economics, recent work has suggested that high-powered incentives may be suboptimal for many public sector services, because they may crowd out intrinsic motivation, particularly in instances where agents are highly motivated. We discuss the implications of this insight for the efficiency of public sector outsourcing.

Keywords: Outsourcing, Risk, Incentives, Contracts, Hold-up, Intrinsic motivation

Suggested Citation

Jensen, Paul H. and Stonecash, Robin, Incentives and the Efficiency of Public Sector-Outsourcing Contracts. Journal of Economic Surveys, Vol. 19, No. 5, pp. 767-787, December 2005, Available at SSRN: https://ssrn.com/abstract=857650 or http://dx.doi.org/10.1111/j.0950-0804.2005.00267.x

Paul H. Jensen (Contact Author)

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Robin Stonecash

Australian Graduate School of Management ( email )

Gate 11, Botany Street, Randwick
Sydney, NSW 2052
Australia

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