Cost savings or real efficiency gains? Heterogeneous effects of involving the private market in public service delivery

Abstract

Governments’ endeavours to improve the efficiency of public service delivery often involve contracting out to external providers, which, allegedly, provides the possibility of exploiting the innovative capacity and expertise of the private market. However, most previous studies have focused on economic effects, thereby leaving open the question of whether contracting out results in mere cost savings or in real efficiency gains. This article offers some insights to advance the debate. Using municipal road maintenance in Denmark as an empirical test bed, we find that contracting out has on average reduced costs. Furthermore, we include a control for service quality, and show that the cost savings are still significant, thus indicating that a genuine efficiency gain has been realized. Nevertheless, while some municipalities have benefitted from contracting out, others have not. We conclude that cost effects are heterogeneous and contingent on municipal size and prior level of contracting out.