The influence of transactions costs on municipal and county government choices of alternative modes of service provision

Governments choose not only what services to provide, but also the mechanisms for delivering these services to citizens (Stein, 1990). In orthodox economic analysis governments make service delivery decisions based on the relative costs of traditional factors of production – fixed assets, labor, and capital. More recent scholarship highlights the role of transaction costs – the relative management costs of performing functions under alternative institutional arrangements – in organizational behavior (Williamson, 1981, 1989, 1990, 1991, 1996). We build on this research by arguing that municipal and county governments organize themselves to perform different functions in part in an effort to reduce transaction costs. For these governments, transaction costs are primarily a product of the nature of the service to be delivered (i.e. the function to be performed). We hypothesize that governments moderate transaction costs by matching service delivery mechanisms to particular types of service. In this paper, we examine how municipal and county governments make choices about how to deliver services across five modes of service delivery – direct service provision, joint contracting, complete contracts with other governments, complet