Contracting and Sector Choice across Municipal Services

contract out for goods and ser vices or produce them inter nally (i.e., the or buy decision) has intrigued scholars of public agencies and pri vate firms for decades (see Coase 1937). Most explanations of vertical integration in private firms emphasize transaction costs incurred in negotiating, monitoring, and enforcing a contract or agreement. Expanding upon this framework, New Institutionalist scholars claim that the organization of transactions within rather than between firms is contin gent upon the relative costs of internal and external transactions (Williamson 1975). If the cost of negotiating and enforcing con tracts between firms is high, firms will have an incentive to organize production on their own rather than seek out external suppliers. Governments, like firms, desire efficient production, but production efficiencies in governments can be lost when transaction costs are high, just as they can in private firms. Service contracts and the sector to which they are assigned are dependent upon the type of policy and the stability of the administrative environment within which the contracting process is managed. Certain classes of polices entail considerable monitoring and measure ment costs that make contracting with private agents problematic. In addition, uncertainty resulting from an unstable administrative en vironment reduces the ability of a local gov ernment to negotiate contracts, make cred ible commitments to suppliers, and enforce contracts.