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Government provision: drawing organizational boundaries

7 important questions on Government provision: drawing organizational boundaries

The delivery of public services through other for-profit firms or private not-for-profit organizations os typically described as:

Contracting out or outsourcing

In drawing organizational boundaries for policy alternatives, analysts should take account of transaction costs as well as production costs, because both are components of social cost. In order to address the relative efficiency of different organizational forms, we draw from the core idea behind transaction cost theory:

The theory uses 'the transaction', whatever that may be in the particular context, as the unit of analysis. + a transaction can only be understood in the context of the initial allocation of property rights.
Transaction cost theory recognizes that almost all production relationships involve contracts.
It recognizes that contracts are rarely, if ever, complete; the world is complex, and unforeseen contingencies can almost always arise to make existing contracts incomplete.
It recognizes the ubiquity of informational asymmetries.

Production costs are the opportunity costs of the real resources - land, labour, and capital - actually used to produce something. In a competitive environment free from market failures, profit-oriented firms will generally have lower costs than public or mixed-ownership organizations, for three reasons:

In-house production may entail production at too levels to be efficient;
Absence of competition may result in X-inefficiency;
Inflexibility in the choice of factor inputs may contributes to X-inefficiency.

Incremental bargaining costs of contracting out relative to agency production are relevant. It include four components:

The costs arising directly in negotiating contract details;
The costs of negotiating changes to the contract in the post-contract stage when unforeseen circumstances arise;
The costs of monitoring whether performance is being adhered to by other parties;
The costs of disputes that arise if neither party wishes to utilize pre-agreed resolution mechanisms.

Three major factors are likely to determine the sum of bargaining and opportunism costs in a specific contracting-out context:

Task complexity
Degree of contestability
Degree of asset specificity

A contestable market is one in which:

Even if only one organization is immediately available to supply a service, many other suppliers would quickly become available if the offered price exceeds the average cost incurred by potential contract providers.

There has been a global trend toward the creation of more autonomous public organizations. Increased managerial autonomy presents a trade-off between two kinds of principle agent problems:

On the one hand, greater control over hiring, firing, and rewarding employees gives managers more opportunity to employ the sorts of business practices that contribute too private-sector efficiency. Additionally, higher-powered incentives potentially incentivize managers to efficiently use organizational resources.
On the other hand, and increased emphasis on efficiency by managers may conflict with more varied public goals. Further, autonomy typically weakens the authority of government oversight normally used to discipline bureaus.

The question on the page originate from the summary of the following study material:

Policy Analysis Concepts and Practice | 9781317345640 | David L Weimer, et al

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Government provision: drawing organizational boundaries

7 important questions on Government provision: drawing organizational boundaries

The delivery of public services through other for-profit firms or private not-for-profit organizations os typically described as:

Incremental bargaining costs of contracting out relative to agency production are relevant. It include four components:

Three major factors are likely to determine the sum of bargaining and opportunism costs in a specific contracting-out context:

A contestable market is one in which:

There has been a global trend toward the creation of more autonomous public organizations. Increased managerial autonomy presents a trade-off between two kinds of principle agent problems:

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