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Peer Reviewed
What Options Are Available for Delivering Public Services, and How Do Local Governments Choose Between Them?
This is a peer-reviewed entry published in Encyclopedia Journal, full entry can be found at 10.3390/encyclopedia5030089

Local governments provide numerous services to their citizens. In doing so, they utilize two primary methods to deliver them: (1) producing them in-house with their own employees and equipment or (2) outsourcing them to external actors, which may take the form of other public agencies, for-profit firms, or non-profit organizations. In this entry, the authors review the logic of why local governments might choose one mechanism over another. The goal is to give readers a feel for the state of the academic literature in this regard. After reviewing basic concepts, such as the difference between the “provision” and “production” of services, the authors frame the discussion in terms of a variety of lenses used by scholars attempting to better understand the determinants of such decision-making. These include agency theory, transaction cost economics, and New Public Management. The authors also consider the role that management capacity plays in allowing cities to successfully deliver services to their constituents. Additionally, the authors offer a discussion regarding how local governments partner with non-profits in less formal ways than contracting to ensure their citizens have access to needed services. Finally, there is a review of the tradeoffs between efficiency and other values that should be accounted for when arranging service production.

service provision service production service delivery service contracting outsourcing privatization competitive tendering
Local governments “provide” (i.e., plan, finance, manage, and monitor) a wide variety of services to their citizens. This can include essential and highly visible services such as policing, fire protection, and emergency services, as well as important but more mundane services such as tree trimming and rodent control. To illustrate the breadth of such services, in 2017, the International City/County Management Association (ICMA) fielded a survey gathering information on 74 unique services that are commonly provided by local jurisdictions in the United States [1]. These services spanned seven functional categories: (1) public works/transportation; (2) public utilities; (3) public safety; (4) health, food, and social services; (5) parks and recreation; (6) community development; and (7) support functions. While expansive, the ICMA list should not be considered exhaustive.
For each service provided, public managers must answer a fundamental question: should the service be “produced” internally using their own resources (i.e., public employees and equipment), or is it better to outsource delivery to external actors (also known as the make-or-buy decision)? If the decision is to opt for external production, which types of vendors (e.g., for-profit, non-profit, or other governmental entity) should be utilized (i.e., the sector choice decision) [2][3]? While government contracting for goods and services has a long history, going back, for example, to before the founding of the Republic in the United States [4][5], traditionally, local governments have tended towards in-house production. This began to change in the 1970s and 1980s when political figures such as Margaret Thatcher and Ronald Reagan, borrowing arguments from libertarian economic intellectuals such as Friedrich Hayek and Milton Friedman, promoted privatization and competitive contracting as ways to make the government more efficient.
Initially, therefore, the choice between internal and external production had ideological overtones, with conservatives generally more in favor of the latter and liberals more supportive of the former. Over time, however, as the practice of outsourcing, a hallmark of the neoliberal system, became more widespread in the wake of growing criticism of the administrative state worldwide, the choice between internal and external delivery became a generally pragmatic choice, an effort to find the most effective and efficient method to produce public services [6][7].
The purpose and contribution of this entry is to comprehensively review the literature that has been developed over several decades, exploring the underlying theoretical determinants of make-or-buy and/or sector choice decisions. These discussions primarily emphasize studies based on the U.S. local government context, although the authors do incorporate research centered on other parts of the world. Theory development in this vein of research has leaned heavily toward economic perspectives such as market theory, agency theory [8], and transaction costs economics (TCE) [9]. However, institutional approaches and various management theories have also been utilized to better understand outsourcing decisions, processes, and outcomes.
Given the diverse foci and theoretical lenses adopted by a wide spectrum of conceptual and empirical studies, recognizing coherent patterns of inquiries and related findings concerning local outsourcing decisions is challenging. However, a rough summary of the notable empirical findings in this body of literature includes the following: (1) while outsourcing is prevalent across local governments, in-house service production is still a dominant delivery mode in the majority of U.S. local jurisdictions [1]; (2) service characteristics such as asset specificity or measurement difficulty matter somewhat in terms of whether to outsource and to whom [10]; (3) joint delivery, whether with other governmental entities or for-profit firms, is quite common [11]; (4) organizational inertia, rather than other jurisdictional or service factors, is the strongest determinant of service production decisions, as both previously outsourced and internally produced services tend to retain their modes between survey periods [12][13]; (5) contracting back in (or reverse contracting) happens relatively frequently [14], commonly owing to concerns with not achieving cost savings or quality goals [1]; (6) the effects of jurisdictional characteristics such as the form of government (e.g., council–manager form) are inconsistent [6][15]; (7) local governments often do not fully fund but only partially contribute to service delivery, especially when non-profits are involved [16][17][18]; and (8) local governments tend to monitor less intensively when other governmental entities or non-profits deliver services [18][19]. These are, of course, only a few selected findings. In what follows in the next several sections, the authors further elaborate on how some of these factors come into play in making decisions regarding local service delivery.
Prior to articulating exactly how scholars examine make-or-buy and sector choice decisions, however, the authors suggest a couple of overarching analytical frameworks as organizing or synthesizing tools to more systematically understand the literature development and how it has evolved. The first framework is concerned with the different levels of analysis used in theorizing and empirically modeling factors that matter in outsourcing decisions. A micro-level perspective is frequently deployed by both economic and institutional theorists. Economic theory (e.g., agency theory or TCE), for example, explores contract agents’ self-interest-based motivations as well as individual service characteristics that enable or constrain agent behaviors and principals’ ability to effectively monitor agents [10]. Neoinstitutional theory is also adopted to account for individual actors, for instance, regarding how local professional managers might internalize the ethos of managerialism/neoliberalism through training or professional networking [20], leading them to prefer “buying” rather than “making” services owing to expected efficiency gains.
Meso-level perspectives highlight organizational characteristics that are taken into consideration in decision-making. For example, the ownership characteristics of external service producers (e.g., private, for-profit firms, non-profit organizations, or special or general governmental entities) have been extensively studied as factors in vendor selection due to the different legal, governing, operational, and incentive structures associated with organizational forms. Ownership research largely adopts economic outlooks (e.g., profit-driven incentives for private, for-profit firms juxtaposed with the nondistributiveness of non-profit entities) [21][22], although management-related theories (such as management capacity and smart buyer, managing competition, or relational contract management based on trust) [23] developed across the fields of public and business management are also impactful in increasing our understanding of outsourcing decisions and outcomes.
Lastly, macro-level perspectives focus on examining political (e.g., ideology of the locale, citizen voting preference, partisanship of political leaders, etc.) [24] as well as socioeconomic and demographic factors (e.g., minority populations, poverty rates, education levels, etc.). Empirical research into the determinants of make-or-buy/sector choice decisions also incorporates municipal or county governments’ jurisdictional characteristics such as place (urban, suburban, or rural) and fiscal conditions to gauge the nature of vendor markets as well as the governments’ need for cost savings that might be achieved through outsourcing [25]. Thinking in terms of the micro-, meso-, and macro-level lenses helps us more clearly understand the complexity of local service outsourcing decisions where different variables and related dynamics contribute uniquely to decision-making.
The second analytical framework the authors suggest concerns competing public values that underlie the literature development. Until fairly recently, research, especially in the United States, has heavily focused on efficiency gains as the main public value to pursue in local government service production decisions. However, scholars have increasingly searched for alternative paradigms to New Public Management to balance their efficiency-centric views with a broader set of competing public values that emphasize democratic governance in service delivery arrangement decisions [26]. Citizen engagement or citizen co-production in local service delivery has been one of the growing topics seen at the center of this effort [27]. While the breadth and depth of the emerging literature are yet to be determined, it certainly has the potential to serve as an intellectual counterweight against the efficiency logic that has dominated the local service delivery literature. For this reason, it may be useful to think about organizing the literature in terms of studies based on efficiency logic versus those guided by democracy logic or public service logic [28].
Now, the authors move the discussion to the substantive literature developed in the U.S. setting, exploring make-or-buy and sector choice decisions.

References

  1. International City/County Management Association. 2017 Alternative Service Delivery Survey: Summary of Survey Results; ICMA: Washington, DC, USA, 2019.
  2. Ferris, J.; Graddy, E. Contracting out: For what? With whom? Public Adm. Rev. 1986, 46, 332–344.
  3. Anguelov, L.G.; Brunjes, B.M. A replication of “Contracting out: For what? With whom?”. Public Adm. 2023, 101, 1163–1197.
  4. Nagle, J.F. A History of Government Contracting, 2nd ed.; George Washington University Law School Government Contracts Program: Washington, DC, USA, 1999.
  5. Lamothe, S. Competitive sourcing. In Global Encyclopedia of Public Administration, Public Policy, and Governance; Farazmand, A., Ed.; Springer Nature: New York, NY, USA, 2022; pp. 2263–2267.
  6. Hefetz, A.; Warner, M. Privatization and its reverse: Explaining the dynamics of the government contracting process. J. Public Adm. Res. Theory 2004, 14, 171–190.
  7. Warner, M.E. Pragmatic municipalism: Privatization and remunicipalisation in the US. Local Gov. Stud. 2024, 50, 677–695.
  8. Ross, S.A. The economic theory of agency: The principal’s problem. Am. Econ. Rev. 1973, 62, 134–139.
  9. Williamson, O.E. The Economic Institutions of Capitalism; The Free Press: New York, NY, USA, 1985.
  10. Brown, T.L.; Potoski, M. Transaction costs and institutional explanations for government service production decisions. J. Public Adm. Res. Theory 2003, 13, 441–468.
  11. Warner, M.E.; Hefetz, A. Managing markets for public service: The role of mixed public-private delivery of city services. Public Adm. Rev. 2008, 68, 155–166.
  12. Brown, T.L.; Potoski, M.; Van Slyke, D.M. Changing modes of service delivery: How past choices structure future choices. Environ. Plan. C Gov. Policy 2008, 26, 127–143.
  13. Lamothe, S.; Lamothe, M.; Feiock, R.C. Examining local government service delivery arrangements over time. Urban Aff. Rev. 2008, 44, 27–57.
  14. Voorn, B. Country, sector and method effects in studying remunicipalization: A meta-analysis. Int. Rev. Adm. Sci. 2021, 87, 440–460.
  15. Carr, J.B.; LeRoux, K.; Shrestha, M. Institutional ties, transaction costs, and external service production. Urban Aff. Rev. 2009, 44, 403–427.
  16. Whitaker, G.P.; Day, R. How local governments work with nonprofit organizations in North Carolina. Pop. Gov. 2001, 66, 25–32.
  17. Gazley, B. Beyond the contract: The scope and nature of informal government-nonprofit partnerships. Public Adm. Rev. 2008, 68, 141–154.
  18. Lamothe, S.; Lamothe, M. Towards a better understanding of local service provision: Implications for studying the determinants of production choice. Public Adm. Rev. 2024, 84, 904–917.
  19. Marvel, M.K.; Marvel, H.P. Outsourcing oversight: A comparison of monitoring for in-house and contracted services. Public Adm. Rev. 2007, 67, 521–530.
  20. Lubell, M.; Feiock, R.; Ramirez, E. Political institutions and conservation by local governments. Urban Aff. Rev. 2005, 40, 706–729.
  21. Cordery, C.; Howell, B. Ownership, control, agency and residual claims in healthcare: Insights on cooperatives and non-profit organizations. Ann. Public Coop. Econ. 2017, 88, 403–424.
  22. Horwitz, J.R.; Nichols, A. Hospital service offerings still differ substantially by ownership type: Study examines service offerings by hospital ownership type. Health Aff. 2022, 41, 331–340.
  23. Lamothe, M.; Lamothe, S. What determines the formal versus relational nature of local government contracting? Urban Aff. Rev. 2012, 48, 322–353.
  24. Elinder, M.; Jordahl, H. Political preferences and public sector outsourcing. Eur. J. Political Econ. 2013, 30, 43–57.
  25. Hefetz, A.; Warner, M. Contracting or public delivery? The importance of service, market, and management characteristics. J. Public Adm. Res. Theory 2012, 22, 289–317.
  26. Denhardt, R.B.; Denhardt, J.V. The new public service: Serving rather than steering. Public Adm. Rev. 2000, 60, 549–559.
  27. Nabatchi, T.; Sancino, A.; Sicilia, M. Varieties of participation in public services: The who, when, and what of coproduction. Public Adm. Rev. 2017, 77, 766–776.
  28. Osborne, S.P.; Cucciniello, M.; Nasi, G.; Strokosch, K. New development: Strategic user orientation in public services delivery—The missing link in the strategic trinity? Public Money Manag. 2020, 41, 172–175.
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Subjects: Public Administration
Contributors MDPI registered users' name will be linked to their SciProfiles pages. To register with us, please refer to https://encyclopedia.pub/register :
Scott Lamothe
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Meeyoung Lamothe
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Book: Encyclopedia of Social Sciences
Online Date: 30 Jun 2025
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