TO PRODUCE OR TO BUY? EXPLORING DETERMINANTS OF LOCAL GOVERNMENT PRIVATIZATION DECISIONS

The U.S. is experiencing the worst recession since the Great Depression. All levels of government have been hit really hard, this is especially apparent at the local level since services provided at the local level are woven into people’s daily life. Thus, how to “do more with less” is more urgent than ever before. The use of privatization came to surface as a sound solution for deficit-plagued governments as it is thought to be more cost effective and outperform the public sector in most cases. This dissertation contains two empirical chapters that examine determinants of privatization and specify the conditions under which it is optimal to buy and under which it is optimal to produce in-house. Chapter two explores determinants that contribute to the use of privatization at the local level in the U.S. This chapter incorporates spatial technique to perform the analysis, which is a different approach from much of the literature. Empirical results indicate that a local government’s sourcing decision is affected by its nearby local jurisdictions. External stakeholders’ involvement contributes to the use of outsourcing, whereas having a limited supply of service providers impedes it. Chapter three applies a transaction cost economics (TCE) framework complemented with a revenue volatility measure to disentangle the mechanisms that drive public services’ outsourcing decisions. Results suggest that, in general, services with higher asset specificity and higher contract management difficulty are less likely to be outsourced, and a robust and competitive market facilitates the use of outsourcing