Is the quality of the outsourced public services contingent on the quality of bureaucracy?

Abstract

Outsourced public services make up about half of the total public service delivery in OECD countries today and have increased dramatically over time. Reformers expected that outsourcing would both cut costs and increase quality through rather basic market logic. This paper investigates the impact of outsourcing on one of the fundamental goals of outsourcing – the quality of services. It draws on literature that suggests that markets for public services might often be dysfunctional, especially for complex goods, where highly incomplete contracts are rule, and that we should in fact expect a negative effect of outsourcing on service quality. However, we argue that potential negative consequences can be counter-acted, at least to some extent, with more competent and motivated personnel on the buyer’s side, as contracts will probably be better and monitoring more efficient, which will lessen the room for the vendor’s opportunistic behavior. We test our theoretical predictions empirically using data on the extent of outsourcing, satisfaction with the quality of service and education and pay of the municipal employees in Swedish municipalities. Our analyses show that outsourcing and citizen’s satisfaction with service are indeed negatively correlated, but that the magnitude of this association is lower in municipalities with better educated and better paid staff. We interpret this as supporting the idea that outsourcing is contingent on bureaucratic quality.