Transaction Costs and Institutional Explanations for Government Service Production Decisions

Governments not only choose which services to deliver to citizens, but they also choose how to deliver those services. Governments can produce services themselves or through a variety of external production mechanisms, including contracting with other governments, private firms, and nonprofits. In this article, we apply a transaction cost framework complemented with institutional and market theories to examine governments' service production decisions. Our analyses of a 1997 International CityCounty Management Association survey shows how governments choose service production mechanisms to manage the transaction costs inherent in delivering different types of services.