A study on expenditure, employment, and wage effects of contracting cities and non-contracting cities: Do all contracting services have the same results?

The primary purpose of this paper is to examine the effect of contracting on expenditure, employment, and wage levels in municipal government. The most important question is whether contracting cities can reduce expenditures, employment, and wages more than non-contracting cities do, and whether the reductions depend on the monitoring costs of the particular service. If expenditures, employment, and wages were saved by contracting out with the private sector, contracting cities should show the reduction of those economic indicators. A second question is why some services provided by contracting arrangement are not more efficient than those provided by municipal government. A final question is whether any pervasive demographic, economic, and political factors affect municipal expenditures, employment, and wages. To test these questions, I used a multiple regression analysis model to estimate the effects of contracting on expenditures, employment, and wages across different services. The primary database available for this paper is the "Alternative Service Delivery Approaches-1992," conducted by International City/County Management Association (ICMA). The major empirical finding presented in this paper is that, in general, contracting out with the private sector does not have significant effects on expenditure, employment, and wage levels in municipal governments; contracting out does not reduce the aggregate expenditures, employment, and wages of municipal government. This empirical evidence is not consistent with the general conclusion that contracting arrangement is more efficient mode, and thus yields cost savings relative to public provision. Associated with the individual service area, there is weak evidence that contracting effect is somewhat different from the characteristics of public services; individual service contracting does not lead to more efficient municipal government. One of the most important implications drawn from this paper is that it may be ineffective to try contracting out with private firms to reduce municipal expenditure, employment, and wage levels. In other words, the cost savings obtained from contracting services may be exaggerated; cost savings from contracting services are not realized. Another implication in relation with Niskanen bureau is that although cost savings from service contracting may be realized, these cost savings from service contracting may be internalized by the department, and the net effect on total municipal expenditure may not be realized. It is hard to monitor the amount saved mainly due to information asymmetry among principals (elected officials), bureaucrats, and voters. Therefore, the practice of contracting services in municipal government still remains problematic, largely due to the difficulty of tracing the impact on the potential alternative uses of the cost savings from contracting out.