The success of contracting out services in a quasi-open market

Thomas Allen Denes, University of Pennsylvania

Abstract

Many of the goods and services furnished by the government are contracted to private firms. The general consensus is that competition between suppliers makes contracting for products and services less costly than government- provided services. Although contracting for services by governments may yield lower costs than services provided directly by governments, it is the author's contention that significant barriers exist to achieving least-cost provision of goods and services. These barriers are protectionism, equity programs, inefficient risk allocation, post-award opportunism, collusion, lack of access to capital markets, and incumbency. The methodology for testing the hypothesis consisted of quantitative analysis and anecdotal discussion. The case study is the contracting for dredging services by the U.S. Army Corps of Engineers. Only one of the constraints supported the thesis; the rest did not. The analyses of protectionism showed that it raised the cost of contracted dredging between 7 and 29 percent. The analysis of the other constraints did not support the thesis--either because the effect of the constraints appeared to be neutral or because the anecdotal evidence available was insufficient to render a verdict. For example, the analysis of the effect of equity programs on dredging services showed that small business set-asides had no effect on dredging costs to the government. The analysis of the potential lack of access to capital markets revealed no such constraint. The analyses of incumbency, inefficient risk allocation, post-award opportunism, and collusion did not reveal information which could directly determine the effect of each on contracted dredging costs. However, anecdotal evidence suggests that inefficient risk allocation, post-award opportunism, and collusion have the potential for increasing costs.

Subject Area

Economics|Business costs|Public administration

Recommended Citation

Denes, Thomas Allen, "The success of contracting out services in a quasi-open market" (1996). Dissertations available from ProQuest. AAI9627909.
https://repository.upenn.edu/dissertations/AAI9627909

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