Addressing Agency Problems in Privatizing Public Services

Scholars disagree whether contracting out public services is an effective means of public service provision, especially for social programs. Are social policies different from other public policies? If so, why, and what are the implications in terms of designing and implementing such policies? This paper's formal theory analysis suggests that monitoring cost and political cost are crucial elements, which differentiate social policies from others. One of the policy implications of this paper is to suggest that the key to successful contracting out is to apply effective monitoring systems (fire alarm vs. police patrol) depending on the types of public service recipients.This paper presents both a formal game theoretical model and an empirical analysis. The formal model analyzes a government's contracting out as a set of strategic decisions made by both a government (principal) and a vendor (agent). Among the findings, this paper emphasizes the function of citizen feedback and the application of diverse monitoring schemes. Regression analysis attests the findings of formal modeling analyses. Given that vendor performance and monitoring systems are categorical variables, ordered logit analysis is employed for monitoring and vendor performance data, CERS (Contract Evaluation and Reporting System) from the Florida State Department of Families and Children