Contracting out public service provision to not-for-profit firms

Abstract

In an incomplete-contract setting, we analyse the contracting out of public service provision, comparing the performance of for-profit (FP) and not-for-profit (NP) firms. Two institutional arrangements are considered, control rights lying either with the firm (PPP) or the government (traditional procurement). We show that provision by an NP may be associated with overinvestment in quality improvement, but that under conditions that restrain this overinvestment, the NP may yield greater welfare than obtains with FP-provision. Although none of the four possible arrangements is preferable under all conditions, the introduction of PPP has enhanced the scope for advantageous provision by an NP.