Contracting out: For What? With Whom?

This paper develops a two-stage model of the decision to contract out. The first stage is the choice of whether to produce publicly provided services internally, externally, or to reduce costs as well as potential cost savings, which depend primarily on the nature of a particular service. The second stage in the contracting decision is the choice of sector with which to contract--other governments, private firms, or nonprofit organizations. Sector choice is primarily influenced by the nature of the service and the availability of suppliers in the different sectors. The model is used to analyze the current contracting patterns of 1,780 cities and counties from across the United States.