טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentHefetz Amir
SubjectOutsourcing or In-House Production: An Empirical
Examination of Decision Making in Local Government
DepartmentDepartment of Architecture and Town Planning
Supervisors Professor Emeritus Daniel Shefer
Dr. Danny Ben-Shahar
Full Thesis text - in Hebrew Full thesis text - Hebrew Version


Abstract

Traditionally, local governments have used their own production system for providing public services. More recently, however, alternative delivery modes, especially, outsourcing to the private sector, have become a common practice as part of an ongoing public administration reform. By expanding the theoretical background to organizational and behavioral theories, this study constructs a framework for understanding local government behavior in choosing a particular delivery method. This framework emphasizes transaction costs rather than production costs as the reason for delivery mode choice. It shows the possibility of government failure when bureaucrats focus on resources rather than outcomes versus contract failure when services are highly complex and contracts are costly and risky. 

            The research hypotheses are: 1. the preferred delivery mode is correlated with both the properties of the services and the localities; 2. lower costs are correlated with higher probabilities of outsourcing as long as efficient markets exist. By integrating data from the Census of Housing and Population and the Census of Government this research follows the decision-making processes by which local governments make their delivery mode choice across the US.

            Two discrete choice models are used as two step test for the hypotheses. The first step, a binary model, provides the extent of the willingness to outsource. The probability to outsource explains where the conflicting pressures meet. The second step, the multinomial model, includes another alternative to direct public service delivery, inter-municipal cooperation. This alternative achieves scale economies without loosing direct control. The multinomial choice model defines factors involved in the final choice decision and integrates the willingness to outsource into a public-service demand index.

            Results show that costs play a key role in the choice process, but, occasionally, savings in direct costs (service operating costs) are followed by an increase in total costs (total local government expenditures) of service delivery. This complementary behavior supports the transaction cost approach, where market savings erode due to increasing monitoring and control expenses.

            An important lesson that emerges from this study is that decision-makers in local governments should consider criteria such as stability, flexibility, and reliability beyond mere efficiency. The question whether outsourcing is a reversible process and whether public organizations can be internally improved yet remains. Future research should explore the switching patterns between delivery modes over time by utilizing similar questions to those raised in this study.