|M.Sc Student||Dubinsky Yelena|
|Subject||Outsource or Integrate: A Case Study of Public Services|
|Department||Department of Industrial Engineering and Management||Supervisor||PROF. Benjamin Bental|
|Full Thesis text - in Hebrew|
Local governments can provide services with their own employees (in-house provision) or through a variety of external provision mechanisms such as contracting with private or public sector providers (privatization, outsourcing). The purpose of this paper is to examine which economic factors determine Israeli local governments sourcing decisions in practice, specifically those which were not examined empirically in previous related studies in Israel.
The empirical analysis in this study is motivated by two different theoretical frameworks, which lead to contrary predictions about how privatization decisions will vary across services. Levin and Tadelis (2010) suggest a theoretical model that focuses on economic cost-benefit consideration based on transaction costs theory. They argue that inhouse provision is more likely for services whose performance standards are harder to specify, monitor or adjust (- i.e. services that are characterized by high transaction costs of contracting) and for those whose quality is of high concern. On the contrary, in the Bental, Deffains and Demougin (2012) theoretical framework the focus is on incentive considerations based on double moral hazard. They show that the likelihood of outsourcing increases as contracting difficulties are higher (when the double moral hazard problem is more severe) and as the importance of the service quality is greater.
In an attempt to test these theoretical frameworks and contrary predictions, a survey was conducted among Israeli municipalities, collecting information from 28 of them on the characteristics of 38 different services and their sourcing. Additionally, following previous empirical studies of local municipalities contracting for services, a group of explanatory variables associated with city characteristics was also included in current analysis.
A multinomial logit regression model was used to examine the influence of the above factors on the choice of service delivery mode. The regression results generate odds ratios which represent the impact of each independent variable on the choice of external provision (private contracting or public contracting) compared to the base outcome (provision by city employees).
Overall, the main empirical findings can be summarized as follows. First, services for which it is harder to find or replace a provider, are less likely to be provided by private sector. Secondly, the findings indicate that older cities do more private contracting than younger cities. Additionally, it can be inferred that public contracting appears to be largely a substitute for inhouse provision rather than an analogue of private contracting. In sum, these results tend to weakly support the transaction-costs theory of Levin and Tadelis.