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Outsourcing, Market Structure and Elections

Author

Listed:
  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract
We make a positive analysis of the impact of market structure and political preferences on a (local) government's decision to outsource public service using the framework of Hart, Shleifer and Vishny (1997). We argue that although outsourcing is more attractive when the privte market is competitive, the outsourcing decision will be the same in a competitive as in a monopolistic market. Second, we analyze how the price paid in a private monopoly market depends on how much the government cares about the benefits of the public service, and we provide conditions for when a "leftist, public service loving" politician outsources to a lower price. When this is the case and outsourcing is a salient issue in an election, the median voter prefers a more "leftist" government to be in charge of the outsourcing.

Suggested Citation

  • Morten Bennedsen & Christian Schultz, 2003. "Outsourcing, Market Structure and Elections," CIE Discussion Papers 2003-05, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    • Handle: RePEc:kud:kuieci:2003-05
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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2003-05.pdf/
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    References listed on IDEAS

    as
    1. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    2. Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1997. "Privatization in the United States," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 447-471, Autumn.
    3. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999, Elsevier.
    4. Timothy Besley & Stephen Coate, 1997. "An Economic Model of Representative Democracy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 85-114.
    5. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
    6. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1127-1161.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. Florencio López-de-Silanes, 1997. "Determinants of Privatization Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 965-1025.
    9. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
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    11. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-319, March.
    12. Bennedsen, Morten, 1999. "Political Ownership," Working Papers 11-1999, Copenhagen Business School, Department of Economics.
    13. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," European Economic Review, Elsevier, vol. 40(3-5), pages 569-579, April.
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    Cited by:

    1. Andreas Knabe & Peter Birch Sorensen, 2006. "Outsourcing of Public Sevice Provision: When is it more efficient?," Finnish Economic Papers, Finnish Economic Association, vol. 19(1), pages 3-15, Spring.
    2. Bennedsen, Morten & Schultz, Christian, 2003. "Adaptive Contracting," Working Papers 08-2003, Copenhagen Business School, Department of Economics.
    3. Peter Birch Sørensen, 2004. "Outsourcing of Public Service Provision: When is it More Efficient?," EPRU Working Paper Series 04-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

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    More about this item

    Keywords

    privatization; outsourcing; incomplete contracts; market power; elections;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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