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Insourcing and Outsourcing

Problem, research strategy, and findings: While contracting for the private delivery of public services is common, reversals from private to public provision are also common. Indeed, our U.S. data indicate insourcing (reverse contracting) is roughly equal to the level of new outsourcing for 2002–2007. We analyze these data to better understand how city managers decide to privatize services, or to reverse their privatization. The International City/County Management Association collected survey data on the form of service delivery for 67 local government services; they also report many community characteristics and city manager opinion data we can use to explain that choice. Our statistical models suggest that transactions costs, market management, monitoring, and political interests are all associated with the decision to contract, or to reverse contract. Municipalities appear to experiment by outsourcing those services with high transactions costs, while insourcing reflects a lack of cost savings and the challenges of monitoring and market management of privatized services. Alternatively, mixed public and private delivery (concurrent sourcing) promotes competition and provides the capacity for public provision should contracts fail. Takeaway for practice: The dynamics of outsourcing and insourcing urban services plausibly reflect pragmatic experimentation by government managers in both directions. For private delivery of public services, monitoring is critical, especially as cities experiment with outsourcing services with high transactions costs. Managing market competition also matters, as does retaining the capacity to provide services in-house. Research support: This research was supported in part by U.S. Department of Agriculture National Institute for Food and Agriculture grant # 2011-68006-30793.