Contracting for Government Services: Theory and Evidence from U.S. Cities

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this ‘make-or-buy’ choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.