The Relationship between Population Size and Contracting Out Public Services
Evidence from a Quasi-experiment in Danish Municipalities
The relationship between local government size and contracting out is negative for capital-intensive services, and is positive for labor-intensive services that are difficult to measure and/or are regulated by a free choice market.
What is the causal relationship between population size and the contracting out of public service delivery in local governments? Robust results from this article show that the relationship differs across policy sectors: It is negative for services with high fixed costs, presumably due to scale economies, and is positive for services that are difficult to measure, probably due to more administrative and technical capacity in larger municipalities. Also, the effect of population size is positive for tasks in free-choice markets, presumably because private contractors find large free-choice markets more attractive.
The results make sense of existing research which have found mixed evidence for the relationship between local government size and contracting out
Results of the population size/contracting out relationship have been mixed. A survey of 21 studies conducted from 1986 to 2006 reported that nine studies found a positive relationship, five studies found a negative relationship, and seven studies reported mixed or insignificant. Since 2006, four newer studies found a positive association, while four other studies reported no or mixed results.
Analysis of the literature identifies two shortcomings in estimating the causal relationship between population size and contracting out. First, all studies measure the relationship by non-experimental cross sectional research designs, which often make the estimates vulnerable to threats to internal validity from unobserved variables and reverse causality. Second, only modest attention has been paid to sectoral explanations where the relationship between size and contracting out depends on the service in question. This article addresses these two shortcomings by using the unique variation created by Denmark’s 2007 local government structural reform and by examining the relationship between population size and contracting out across nine different policy sectors.
The results can be generalized to local governments outside Denmark
The results are primarily valid for the Danish context and for a population increase from an average of 21,960 inhabitants before reform to 52,387 inhabitants after reform and with a control group with an average of 46,475 citizens. However, the findings can be generalized to local governments in other countries that produce similar services and operate within a comparable institutional framework. In fact, the reported negative relationship between population size and contracting out for services with high fixed costs supports the finding in a survey of 32 international studies that concluded that “studies that analyze just one service find more evidence that scale economies are a major [negative] source of privatization” (Bel and Fageda 2009)
The findings are important for policy-makers that wish to change local government size since the effect for contracting out depends on the produced services
The relationship between population size and contracting out in local governments is an important research topic since population size is thought to be a driver behind private contracting which, in turn, can have various implications for the cost and quality of publicly financed services. A main argument in favor of contracting out is that private suppliers expose public organizations to competition that can result in potential cost savings. However, contracting out can also lead to reduced service quality or be viewed as a step towards more fundamental privatization of public services (Blomquist 2004). Moreover, because population size presumably affects the production incentives of both municipalities and private suppliers, public authorities may wish to influence the level of contracting out, for example, by manipulating jurisdiction size.
The findings show the conditional nature of the factors influencing privatization decisions and encourage more research in the politics behind privatization
Besides local government size, the literature generally identifies three main drivers behind contracting out: fiscal stress, public preferences, and the power of interest groups. With respect to this broader literature, this article contributes to recent advances in the privatization field in determining the causal effects of the drivers behind contracting out. Furthermore, it contributes specifically to a growing academic interest in determining the conditional nature of the factors influencing privatization decisions by accounting for the conditional effect of population size due to different service and market characteristics. In a more general sense, it is likely that other drivers of contracting out also work differently depending on context-specific characteristics.
Such characteristics should probably not be confined to market and service features, but could be broadened to include the strength of interest groups within various policy sectors. For instance, the political clout of public employees and service users has been used to explain variations in the level of contracting out across policy sectors in Danish municipalities. Following this logic, the literature could start to further unpack the conditional effect of interest groups and for instance investigate to what extent market characteristics can be explained by the strength of various interest groups that prefer particular market forms.
Acknowledgments:
The authors would like to acknowledge the helpful comments received from Yosef Bhatti, Ole H. Petersen and Jacob G. Hariri as well as very constructive guidance received from the editors and five anonymous reviewers.