International Review of Administrative Sciences

http://ras.sagepub.com/ Incentive power and authority types: towards a model of public service delivery
Dario Barbieri and Domenico Salvatore International Review of Administrative Sciences 2010 76: 347 DOI: 10.1177/0020852309365674 The online version of this article can be found at: http://ras.sagepub.com/content/76/2/347

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International Review of Administrative Sciences

Incentive power and authority types: towards a model of public service delivery Dario Barbieri and Domenico Salvatore
Abstract Substantial research has been conducted concerning the efficiency and efficacy of different modes of public service delivery and contracting out. This article develops a model of service delivery choice taking into account the distinction between public, private and non-profit organizations and the characteristics of the service to be delivered. Transaction Costs Economics has mainly debated the attributes of the technology involved in production and the required investments. In this article, considerations on the organizational nature of the actors participating in the process are added to this framework, pointing out that features of the internal structure and of the external mode of social control of organizational forms make them more suitable for providing certain services rather than others. The model is based on two dimensions: incentives power and authority types. Evidence from the contracting-out debate is used for discussing the implications of the model for the feasibility and efficiency of organizations in the service delivery. Points for practitioners Politicians and public managers daily face the challenge of choosing the best way to manage the delivery of public services to the citizenship. Our research aims at supporting this decisional process, taking into account the nature of the service and of the organization delegated to deliver the service. The incentives provided by different organizational structures and the authority types involved should be considered. Our model suggests that low or high political authority and low- or high-powered incentives can lead to the contractualization to private, public or non-profit organizations. When incentives are high-powered and political authority is low, the service delivery should be privatized.
Dario Barbieri is Post-doctorate Fellow at the Department of Institutional Analysis and Public Manage ment, Universit Bocconi, Milan, Italy. Domenico Salvatore is Assistant Professor at the Department of Management, Universit Parthenope, Naples and researcher at Fondazione SDN, Naples, Italy.
The authors, 2010. Reprints and Permissions: http://www.sagepub.co.uk/journalsPermissions.nav Vol 76(2):347365 [DOI:10.1177/0020852309365674]

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348 International Review of Administrative Sciences 76(2)

Keywords: contracting out, outsourcing, public administration, public management, public sector reform

Introduction
Contracting out by public organizations has been a central issue in public management studies because it has been adopted in many countries by governments believing that external organizations can bring cost savings to the production of goods and services traditionally produced by the public sector. Public services delivery choices have been constantly investigated by public management scholars even if research on contracting is sometimes referred to as extensive and unsystematic ... lacking generalizability and explanatory power (Fernandez, 2007: 1120). Empirical studies have found conflicting evidence concerning both the efficiency and efficacy of contracting out by public organizations (Boyne, 1998). One element that has often been overlooked in such studies is whether it makes any difference for the efficiency and efficacy of the contracting-out process that the organization providing the service is public, private or an NPO (non-profit organization). In this article, this issue is approached from the perspective of New Institutional Economics (henceforth NIE), which assumes that different organizational arrangements offer a variety of incentive systems and authority relationships which may be appropriate to each situation depending on the characteristics of the service object of the transaction (Williamson, 1975). In an NIE perspective, public, private and non-profit organizations differ in the incentives structure they offer and in the mode of social control they are subject to and, thus, they may be compared in their relative ability to perform different types of activities. NIE is an interdisciplinary stream of research combining economics, organization theory and diverse other scientific approaches: it started as a criticism of orthodox economics and is interested in the social, political and economic institutions governing life. Even if some scholars (see Furubotn and Richter, 1998) argue that the demarcation between NIE and neoclassical economics is still under debate, the individualistic approach of NIE can be seen as a reaction to the holistic vision of traditional economics: decisions in the NIE are considered expressions of rational goals, plans and actions of individuals (Klein, 1999). NIE puts its emphasis on introducing institutional realism into economic analysis. Some public bodies own a degree of sovereignty traditionally not questioned by (and not contracted to) the private actors, given the nature of their functions (for instance, the judicial courts). Those bodies are usually established to provide a legal framework to the operations of the economy and to allow its existence and the fairness of the rules which regulate its functioning mechanisms. The choice of delivering a service in house or contracting it out is in fact a complex decision usually depending not (only) on questions of efficacy and efficiency but on other political variables such as the ideology of the party in power. Indeed, political ideology often influences contracting-out decisions. Nonetheless, the nature of the services to be provided and of the institutions providing them can be used to develop a model of choice of service delivery mode useful to public managers in order to take into account the consequences of the choice on efficacy and efficiency and not (only) political or ideological justifications.
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Barbieri and Salvatore Incentives and authority types in public service delivery 349

A central feature of the NIE approach is the efficiency of the transaction since it determines whether it should proceed through the market or be internalized within an organization (Ferlie, 1992). Accordingly, the public sector can be seen as an extreme case of a large, vertically integrated organization that, because of its unusually large size, is likely to enjoy cost savings by externalizing the production of the goods it traditionally produces (Bingman and Pitsvada, 1997). It is easy, therefore, to consider the size of governments as unreasonable from an efficiency perspective and mainly see it as a consequence of historical, social and political considerations.

NIE approaches to contracting-out decisions

Following an NIE approach, there are two factors to be considered in taking delivery decisions: the institutional environment and the institutional arrangements (Davis and North, 1971). Institutional environment refers to the background constraints (formal rules or implicit informal social rules and norms) guiding individual behaviour. The social result would be the result of the individual goals and decisions of individuals. Institutional arrangements are governance structures (Williamson, 1996) designed to govern the economic (and social) transactions. Applying this background framework, scholars taking an NIE approach on contracting out have so far tended to apply mainly transaction costs economics. Usually they have conducted a series of studies that have adjusted the standard transaction costs economics by specific public sector contingencies. These specificities can be classified into four groups. The first group of these specificities is represented by ethical or equity considerations. Following the assumption that firms integrate vertically to control valuable specific assets that could be lost in the case of a detrimental reinterpretation of a contract, Stein (1990) found that, as expected by traditional transaction costs econ omics (Williamson, 1985), asset specificity is a fundamental consideration when public organizations have to consider the make-or-buy decision. However, he also found that, in addition to motives of efficiency, ethics or equity evaluations are taken into account. Similarly, Sclar (2000) argues that governments sometimes decide to externalize to NPOs or to other public organizations instead of private firms because their values and objectives are more likely to coincide with those of the government, even if their efficiency is less than that of a private firm. For example, local governments may prefer to contract to an NPO rather than to private organizations the operations of services for the homeless because of the belief that they will pay more attention to finding and taking care of individuals in real need. A second group of specificities is related to political and administrative instability. Clingermayer and Feiock (1997) found that political turmoil, caused by the turnover in elected leadership, can affect the costs of negotiating, enacting and enforcing the provisions of contracts or informal agreements between a government and an external supplier of services (Prager, 1994). It might also happen that municipalities are unable to find any external supplier ready to accept the responsibility for a government service without asking for a very high risk premium. In fact, this usually happens when political turnover is very high and elected officials cannot commit to long-term contracts. In Italy, for example, the construction and operation of nuclear plants has been allowed, stopped for 20 years, and then allowed again by governments of
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350 International Review of Administrative Sciences 76(2)

different political orientations imposing risks and costs on private companies in the industry which had to be financially compensated. A third group of specificities is related to the idea that public services are mostly impossible to measure. Brown and Potoski (2003a) have classified what governments deliver as meterable and non-meterable services depending on the level of asset specificity and ease of measurement. The decision whether to contract out or not then depends on the meterability and specificity characteristics of the service. In fact, for public services there is not a price established in a free market acting as a proxy measure of the value of the service, and outcome measures should be collected and their relative importance should be evaluated. The final group of public sector-specific issues in the contracting-out process is related to institutional and market factors. Here, institutional factors refer to all aspects concerning funding constraints of the government, its human resources, and the presence of organized and active citizen unions. Market factors, instead, refer to the presence of a competitive marketplace, its richness and its diversity, all of which offer a government the chance to choose from different governance options (private firms, NPOs and so on). Factors such as the availability of tax-generated funds, the relationship of the public administration with its citizens and the presence of an acceptable providers market can influence the decision of whether to contract out a public service or not (Field and Peck, 2004; Hefetz and Warner, 2004). For example, local governments may decide to contract out a service only because national-level cost-containment measures do not allow it to hire enough human resources, or may not contract out another service only because public opinion would oppose it for ideological reasons. Although Rehnberg (1990) argues that asset specificity and the degree of uncertainty of the transactions are poor predictors of the degree of externalization of public services, NIE and specifically transaction costs economics have been widely applied to the contracting out of public services. In more general terms, many studies conclude that the contracting-out decision is influenced by the nature of the service, market structures, trust and the experience of governments and vendors (Brown and Potoski, 2003c, 2005). In addition, elements such as political conflicts, administrative change and power issues have been considered as intervening factors influencing contracting decisions (Arnold, 1991; Brudney et al., 2004; Christensen and Lgreid, 2001; Clingermayer and Feiock, 1997; Larbi, 2001; Ryan, 1999; Sappington and Stiglitz, 1987). Monitoring and other post-contracting activities have also been considered in the literature (Milward and Provan, 2000). Brown and Potoski (2004a) show that governments more closely monitor the situation when contracting out and that market management and monitoring should be considered equally important when contracted-out activities are performed (Brown and Potoski, 2003b, 2004b). Political influence is also an important factor (Brown and Potoski, 2003c): it can be internal to the municipality (e.g. conservative office-holders; self-promoting city managers) or external (e.g. a wellorganized citizenry; a close relationship between citizens and municipality). By reviewing the public administration literature on contracting out and the organizational economic literature, there are several characteristics in which variances in services relating to contracts have been identified and these have been grouped into two main dimensions, namely, the feasibility of high-powered incentives for the
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Barbieri and Salvatore Incentives and authority types in public service delivery 351

provision of the service (incentive dimension) and the likelihood that individual actors autonomously arrange the production and exchange on the market of the service without the intervention of a political authority (political authority dimension). The rest of the article is organized as follows. In the next two sections, the nature of services and of organizations is discussed, focusing, in two subsections within each section, on their features related to incentives and political authority. It is argued that some features of services imply the need for specific types of incentives and authority relations to be effectively and efficiently provided and that public, private and non-profit organizations are all forms of governance better able to deal with a specific type of incentive and authority. The implications of these features are then developed in a model of public service delivery choice that aims to predict the most effective nature of an organization for the provision of a service, given the features of the service in its incentive or political authority dimensions. In the last section this model is discussed highlighting evidence from a review of the literature along with its limitations.

The features of the services and their provision

According to Donahue (1989), contractor compliance with the priorities of the government is most likely when the service to be contracted can be specified in advance, subject to competition among suppliers, and monitored by the government. This widely accepted position is consistent with the formalization done during the 1990s in a research stream in organizational economics usually referred to as the property rights theory of the firm (Hart and Moore, 1990). This theory develops from the assumption of contracts being incomplete: if it is not possible to envisage every contingency in advance, the owner of an asset or firm can subsequently make all decisions concerning the asset or firm that are not included in an initial contract or in regulations. Ownership matters because the owner has residual control rights, or the right to make decisions or to appropriate resources that have not been previously anticipated or assigned in ex-ante contracts. Applying this insight to the contracting-out context leads to the conclusion that, in the hypothetical case of complete contracting, the government would not need to own a firm to control its behaviour because any goals, economic or otherwise, can be achieved via a detailed initial contract or regulation (Hart, 2003). Since governments cannot specify in full detail the individual and organizational behaviour required to meet all the contingencies, the need for governmental ownership derives from the impossibility of drawing up a contract (or a law) comprehensive enough to cover all the possible contingencies of transactions which could affect participation in returns from the investment. If governments were able to identify all future contingencies in contracts or laws, and enforce them perfectly, they would be able to use their financial resources to contract out (or use coercive power to regulate) the production of whatever goods and services were deemed necessary. Although the complete specification in a contract of all the future contingencies of a contracting-out relationship is objectively impossible in any real sense, services vary in the degree to which they can be specified in advance and monitored ex post. Therefore, it is important to consider ownership, governance structures and the resulting incentive systems and authority relationships.
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352 International Review of Administrative Sciences 76(2)

Moreover, services vary along other dimensions, which can make the prospect less or more likely that private organizations (or individual actors) autonomously arrange their production and exchange on the market without the intervention of a political authority. Market authority derives from the voluntary agreements of two or more individuals and has several bases including competence, communication efficiency, control efficiency, conflict resolution and exchange of decision rights against risk-free rewards (Grandori, 1997). Governmental (political) authority, on the other hand, involves social control through rules and directives issued by the government and does not need the consent of individuals to engage in the sort of exchange (Perry and Rainey, 1988) required by market authority such as when, for example, an employment contract is accepted. Any service is provided using both types of authority to coordinate transactions (Bozeman, 1987) but the degree to which both political and market authority are involved can vary in the provision of each service. The incentive dimension of services According to NIE, the type of incentives provided to individuals is one of the main determinants of their behaviour. High-powered incentives are those provided by transactions in which efficiency gains flow directly to the individuals transacting and are typically offered by governance structures similar to the pure market. Lowpowered incentives, in contrast, are provided by transactions in which the individuals involved are not able to personally lay claim to the gains from trade, except perhaps in terms of a pay rise or a promotion. A governance structure that typically provides low-powered incentives is the pure hierarchy (Frant, 1996). The feasibility of using high-powered incentives to direct individual behaviour towards a goal such as the provision of a service to other individuals depends on the difficulty in measuring all the relevant dimensions of performance of an organization (Holmstrom and Milgrom, 1991). Although high-powered incentives, according to NIE, induce a self-interested individual to innovate and increase efficiency, in many settings it is difficult to measure the synergies or sabotage between agents and/or it can be difficult to predict the long-run consequences of an agents action based on the observed short-run contribution (Gibbons, 1998). In these settings, low-powered incentives may be preferred and, thus, are a superior governance mechanism when (i)it is hard to assess the performance of an agent, (ii) an agent has been given multiple objectives of which at least one is difficult to measure, and (iii) an agent has more than one principal with heterogeneous priorities. In these cases, performance incent ives induce unwanted behaviours (i.e. directing effort only towards the measurable dimension of performance) and should be avoided or substituted with constraints (Holmstrom and Milgrom, 1991, 1994). Weak incentives are also more efficient in situations in which high-powered incentives create a waste of resources because of unproductive signalling efforts (Acemoglu et al., 2008). The existence of more than one aim (e.g. efficiency and equity) and the existence of multiple principals with heterogeneous preferences (e.g. citizens desiring a different quantity or quality of a service) make it more likely that at least one of the relevant dimensions of performance is difficult to measure. In some cases it may even be impossible to simply rank the preferences of multiple principals into an order of priority. In the absence of high-powered incentives, detrimental behaviour is not induced.
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Barbieri and Salvatore Incentives and authority types in public service delivery 353

However, at the same time, neither are efficiency-gain behaviours induced, except for the higher probability that, without high-powered incentives, altruistic motives would play a bigger role in individual behaviour. For example, the operation of mental hospitals has at least two different objectives: to cure and protect in the interest of different stakeholders such as patients, families, citizens and employees. It may be difficult to devise good measures for each objective and to rank their relative importance; specifying just few such as costs and number of patients treated could affect the difficultto-measure quality of the services offered to patients and their families. Competition, contestability and joint ownership may improve measurability and, thus, affect the incentive dimension: competition and contestability by allowing benchmarking quality and costs among more than one provider; joint ownership by allowing the government to monitor the partner in the day-by-day interaction. On the other hand, having multiple objectives simply increases the likelihood that at least one of them is not appropriately measurable. Having multiple principals increases the likelihood that they have heterogeneous preferences and, therefore, multiple objectives. The authority dimension of services What the proper scope of governments should be is one of the enormous questions politicians and administrators face. Market exchanges may have many advantages over government provision. First, markets are a feasible governance mechanism when other kinds of authority (either political or market) are not. Authority is only able to effectively coordinate activities if (i) information and competence relevant to solving economic action problems can be transferred to and handled by a single actor, (ii) a positive zone of acceptance of authority exists, (iii) the actions are observable, and (iv) the system is not so large as to incur an overwhelming communication channel overload and control losses (Grandori, 1997). Second, in the same way that market exchanges are typically associated with high-powered incentives, individuals are motivated to introduce innovations that increase productivity and efficiency. Third, market exchanges do not imply non-monetary costs to individuals being forced to do things against their will (e.g. paying taxes to finance a service, or serving in mandatory military service). Nonetheless, most governments are still involved in a large part of economic activities and, to the extent that they benefit from a legal framework applied to the operating mechanisms of the economy set by political authority, every activity is organized using some degree of publicness (Bozeman, 1987). A classic economic reason for government intervention is a sub-optimal market structure that arises in markets for services for which the consumption cannot be excluded or individually charged (e.g. public goods) or in markets for services for which the negative or positive consequences are received by parties external to the market transaction (e.g. externalities); for example, public intervention for the functioning of public goods such as lighthouses in the form of financing from general taxation or granting the right to whoever operates it to levy a (specified) toll on ships benefiting from it (Coase, 1974). In terms of features of services, the main dimension on which services vary affecting the market structure is the excludability of their benefits or costs. The more difficult or costly it is to exclude consumption or bearing externalities by individuals external to a market transaction, the less the market exchange is a feasible governance
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354 International Review of Administrative Sciences 76(2) Table 1 Differences among services in their incentive and marketability dimensions Sub-dimensions of the incentive dimension Sub-dimensions of the authority dimension

ability to specify in advance the excludability of the service content of the service measurability of all the relevant ethical concern about the features of quality consumption of the service

mechanism for transactions: as a result there is need for political authority. Among the services characterized by low excludability are the core services typically provided by any government which establishes a constitutional structure, rules of law, safety, protection from external enemies, and stability, without which there would be no market. A second case in which the service is not marketable is when the service is mostly needed by people who cannot afford to pay for it and, at the same time, because of ethical concerns the service should be provided (for example, health care for poor people).

The degree of publicness of governance forms and the provision of services

Although much of the classic work in NIE has tended to focus on the differences between broad classes of governance structures, such as market, hierarchies and hybrid forms, in this article the discussion is focused on the differences between three types of hierarchies: public, private and NPO. Whether an organization is public, private or NPO (a concept referred to as its nature in this article) implies substantial differences, supporting the idea that the nature of the contractor matters when considering the contracting-out decision from an NIE perspective. NIE assumes that the various intra- and inter-organizational arrangements observed in contemporary economies represent alternative ways of organizing the exchange of goods and services in the context of self-interested behaviour, diverging goals, and imperfect information. Such arrangements offer a variety of incentive systems and authority relationships that cannot be obtained in simple market transactions (Williamson, 1975). The capabilities of public, private and NPO governance forms in providing incentives to individuals As mentioned, compared to the market, organizations provide lower-powered incent ives. However, private organizations still provide higher incentives to individuals if compared to public and non-profit organizations. Public and non-profit organizations have a non-distribution constraint that prevents them from distributing the profits they earn to persons who exercise the control. Since there is no residual claimant, those controlling the firm do not have high-powered incentives to increase revenues or reduce costs and, therefore, are neither induced to devise high-powered incent ive systems for employees such as, for instance, revenue-sharing compensation proDownloaded from ras.sagepub.com by malse yulivestra on October 15, 2010

Barbieri and Salvatore Incentives and authority types in public service delivery 355

grammes, nor to use the hierarchy to foster efficiency gains. It has been demonstrated that private organizations are more prone to opportunism (Cohen, 2001) than public and non-profit organizations and also that cost savings and higher efficiency are in many cases (but not always; see for instance Boyne, 1998) associated with service delivery in the charge of private and non-profit organizations (Bennett and Johnson, 1979; Donahue, 1989; Ferris and Graddy, 1991). Among the two types of hierarchies with a non-distribution constraint, public organizations can devise systems that decrease incentives for self-interested behaviour better than NPOs. For instance, by requiring a public organization to return unexpended funds to the central treasury and by limiting redeployment of resources tied to a specific purpose, public organizations can avoid the use of savings to improve on-the-job amenities (Williamson, 1999). On the other hand, private firms shareholders have an incentive to devise high-powered compensation schemes, if feasible, because giving employees a part of the increased revenues or reduced costs may improve their overall residual profits. Governments could alternatively contract out the provision of a service to a private organization, devising a contract that minimizes the power of incentives it provides to the contractor by, for example, financing the service with a fixed amount (e.g. in blocked contracts) while specifying some of the quality standards of the service. But this solution will not be as effective as the provision by a public organization because for as long as the service is low on the incentive dimension because of being difficult to specify or to measure, the government will fail to set clear and enforceable quality standards and, therefore, a private organization will be subject to the incentive to reduce costs, even by reducing the non-contractable quality, since it can distribute the savings it makes. Also, the absence of profit motives may increase the possibility that employees will increase their efforts for efficacy out of altruism. The current distribution of activities among the public and the private sectors reflects, along with many other factors, the fact that public organizations are well suited to reduce high-powered incentives as expected in an NIE perspective. In a systematic theory of incentives in government, Tirole (1994) justifies the need for low-powered incentives in the public sector because of multiplicity of goals, lack of comparison, heterogeneity of owners tastes, and dispersed ownership. Dixit (1997, 2002) proposes an alternative, although similar, list of public sector specificities including multiple principals, multiple tasks, lack of competition, and motivated agents. In more general terms, the assumption that public sector objectives are more difficult to measure than private sector objectives is frequently found in most public administration textbooks because of equity goals seeking and because of the presence of political decision-making processes. Moreover, the higher public service motivation of employees in the public sector (Kim, 2005; Wright, 2004) may be explained, along with self-selection and other factors such as gender, education level, management level, monetary preferences of public employees (Perry and Wise, 1990), as an effect of the weaker incentives used by public organizations.

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356 International Review of Administrative Sciences 76(2)

The capabilities of public, private and NPO governance forms in coordinating activities by authority Governance structures differ in the authority relationships they can support: for instance, the market elicits a strong autonomous adaptability and the collective behaviour is the sum of each individuals decision, whereas a hierarchy elicits a strong cooperative adaptability by using authority. Therefore, compared to the market, organizations use authority more than autonomous adaptability. However, among the classes of structures of organizations (or hierarchies), the type of authority the public organizations use, also presents different bases from the one used by private and non-profit organ izations. Political authority and market authority are the two fundamental sources of authority upon which virtually all organizations are based (Bozeman, 1987, 1988). Similar distinctions are commonly made in many public administration studies, such as in Boyne (1998), Dahl and Lindblom (1953), Knott (1993) and Perry and Rainey (1988). Governments are institutions that may legitimately perform transactions without the voluntary agreement of other actors (Olson, 1965, 1993). For this reason, public governance structures imply a set of mechanisms, usually absent in private and non-profit organizations, developed in order to guarantee the accountability to society of political authority use. Many countries have devised complex organizational structures of checks and balances performing ex-ante controls over the abuse of coercion by the government and periodic elections as ex-post control mechanisms. Because private and non-profit organizations are not subject to these controls, public organizations are the only feasible governance form when the activities performed imply the use of political authority. On the other hand, private and non-profit organizations may be more efficient, other things being equal, since they do not have to bear the costs incurred by guarantee mechanisms needed to protect the society from political authority misuse. There are two cases in which political authority can be used in private or non-profit organizations: first, when public authority is delegated to private or non-profit organizations but its use can be effectively monitored and the contracts can anticipate most of the contingencies (tax collection is, for example, often contracted out to private companies); second, when it is illegally used, such as in criminal organizations, based on family ties and loyalty that resemble political authority, using it without employing governance mechanisms able to control its use resulting in a clear detrimental effect for the community.
Table 2 Differences in the incentive systems and authority relationships offered by public, private and non-profit governance structures Public NPO Private Type of incentive Low-powered incentives Low-powered incentives High-powered incentives Type of authority Political Market Market

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Barbieri and Salvatore Incentives and authority types in public service delivery 357

Incentives power and authority: implications for service delivery choice

In the previous sections, it has been shown that some activities should be organized in a way that minimizes high-powered incentives inside the organization and that public and non-profit governance structures are, compared to private structures, more suitable for producing services that require minimizing such incentives. It has also been underlined that if the service is non-marketable, political authority is needed to coordinate individuals, and the public sector should directly finance or manage service provision. Private organizations are not a feasible governance form when high-powered incentives are detrimental to service provision. On the other hand, it is assumed that if a service is high on the incentive dimension, private organizations will introduce more efficiency gain innovations in service delivery than public and non-profit organiz ations, and a service that needs political authority to be produced can be contracted out only if it is high on the incentive dimension. The feasibility of high-powered incentives for the production and the authority dimension of a service are two continuous dimensions and are not dichotomous variables that are simply true or false. The feasibility of high-powered incentives depends on performance measurability, which is a continuous variable based on the quality of the proxy measures available for the performance and on the cost of those measures. Complex performance measurement systems may often be devised but the higher the costs of setting up and maintaining the measurement system, the less feasible are high-powered incentives as a coordination mechanism. When considering performance measurement, the outcome should be evaluated (Bouckaert, 1993). In the private sector, the market share represents an immediate indicator of performance; in the public sector the policy outcome should be considered. Looking at the multiple nature of the objectives, it is often likely that it is not possible to split functions in clear single-objective functions (either in the public or private sector): in the public realm this option is more plausible. The public sector is often structured with multiple principals for a public agency as a means of accountability to different interests: this structuring of principals might not be necessary in every function performed by an agency if it were carried out in the private sector. This criterion is not inherently true to the character of the function being performed but the public nature of the organization, as in for the objectives, can reduce the presence of several principals for the same function. Authority is a continuous dimension too because excludability (which influences the public nature of goods) and individual wealth (which influences the capability of buying services) are continuous variables. Both the incentive and the authority dimensions of services are context-dependent in time and space: for example, the excludability of a service, such as the use of roads by cars, became higher (although still being low) with the availability of technologies able to charge individuals for access to a city centre without human intervention. The risk of detrimental behaviour by individuals that have high-powered incentives may also vary between regions according to the local culture and the social capital in the community. These two dimensions, feasibility of high-powered incentives for the production

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of the service and authority type of the service, can be used to compare alternative choices of service provision by the public sector. Following Williamson (1991), the study of economic organizations in this article is approached from a comparative institutional point of view: according to this framework, forms of organization should always be examined by comparison with the alternatives. Four discrete forms of governance that may be used to provide and finance services are compared: contracting out to private organizations (public financing and private provision); contracting out to non-profit organizations (public financing and non-profit provision); contracting out to public organizations (public financing and provision); privatization (private financing and provision). The rationale behind promoting contracting out to public organizations could be economies of scale or organizational design issues: however, the nature of the organizations does not affect the decision whether to contract out a service or not contract it at all. In the privatization case, the public sector can also retain a regulatory role and perform control through laws. To keep the discussion simple, we consider four discrete governance forms (contracting out to public, to private, to NPO organizations, and privatization) even though in the real world the degree of publicness is a continuous attribute of governance forms (Bozeman, 1987). Hybrid forms, such as publicprivate partnerships or network organizations, fit the model as organizations with an intermediate level of publicness: how they could fit the model is briefly discussed in the next section. The comparison among these discrete forms is represented in Figure 1.

Direct provision or contracting out to public Need for political authority

Contracting out to private providers

Contracting out to public or non-profit organizations

Privatization

Feasibility of high-powered incentives Figure 1 Two-dimensional continuum of incentive power and authority type and service delivery choice

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Barbieri and Salvatore Incentives and authority types in public service delivery 359

A service that is high both in the dimension of feasibility of high-powered incen ives for its provision and in the dimension of political authority can be provided by a private organization because there is not the risk that unwanted behaviour will be induced. On the other hand, private organizations do not produce such a service without public intervention because its low-marketability makes it difficult to produce a profit. In this situation (e.g. an easily measurable public service such as street lighting or garbage collection), the public sector should finance the service using political authority to collect taxes, set service standards, and contract it out to a private organ ization (Borcherding et al., 1982; Wilson, 1989) since incentives for efficiency gains are stronger for this governance form and the quality of the service provision and of the use of resources obtained through the exercise of political authority can be measured or monitored. A service low both in the incentive dimension and in the political authority dimension should be managed by a public or a non-profit organization even if it could be profitable and does not need the use of political authority to be provided. In this situation (e.g. a private service for which good performance measures are unavailable, such as elementary education; see, for instance, Acemoglu and Pischke, 1999), private companies may be willing to provide the service more efficiently, but the incentive to reduce non-measurable and non-contractible quality makes them unfeasible as a form of governance. A service low on the incentive dimension and high on the political authority dimension should be managed directly by a public organization or, if economies of scale or agency design issues require it, contracted out to another public organization. A low authority dimension implies that the service delivery should be organized using political authority, and a low incentive dimension implies that non-specifiable or measurable features of the provision exist. In this case, only an organization directly controlled by the political actor could use the political authority because it is subject to political decision-making rules lowering the risk of abuse of political authority. In this situation (e.g. deciding on a long-term strategy to use public funds for the development of a region) the use of public resources cannot be delegated to any type of non-public organization because the lack of adequate measurement indicators makes any accountability mechanism unfeasible. If a service is high on the incentives and low on the political authority dimension, the government should limit the use of political authority to create the conditions to make the market work through appropriate laws and regulation. The service should be privatized since it will be profitable to the private sector that can most efficiently produce it.

Discussion and conclusion

NIE relies heavily on the assumption that successful economic actors act according to their self-interest, not having drawn heavily from the empirical work in organizations and decision-making for its auxiliary assumptions. According to Simon (1991: 27), believing in NIE arguments is an act of faith. Nonetheless, NIE has dominated the empirical and theoretical approach to contracting out in the public sector in the last 20 years and, even more importantly, as Williamson (1996: 55) has argued: TCE
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360 International Review of Administrative Sciences 76(2)

is an empirical success story. Public management literature studying contracting out from a transaction costs economics perspective has mainly debated the attributes of the technology involved in production and about the required investments. In this article, considerations regarding the organizational nature of the actors participating in the process are added to this framework, pointing out that features of the internal structure and of the external mode of social control of organizational forms make them more suitable for providing certain services rather than others. On the one hand, non-distribution constraints characterize public and non-profit organizations: for this reason these governance forms are able to minimize the power of incentives provided to individuals. High-powered incentives are detrimental in the case of nonmeasurability of goals or the impossibility of specifying the objectives to be reached, and in these cases the power of incentives should be minimized. On the other hand, given their mode of external control, governance forms also differ in the type of authority they are able to exert in the provision of services. Public organizations are those equipped with the governance features that minimize the risk of misuse of political authority. Political authority is needed when voluntary individual behaviour does not allow the production of a service. Indeed, for certain kinds of activities, it is hard to use high-powered incentives and, since contracting out would not be so efficient if the organizations did not provide high-powered incentives to the contractor, activities of this sort should not be contracted out. The managerial implications of the approach presented in this article are represented in Figure 1. Some previously published empirical studies are in line with the implications reported in this figure. When services are characterized by low political authority and the need for lowpowered incentives, Figure 1 suggests that they should be contracted out for delivery by a public or a non-profit organization. Ferris and Graddy (1991) demonstrate that a performance-based allocation of education funding is likely to work only if performance can be adequately measured. Institutional changes operating in contexts where performance is difficult to measure are less likely to generate substantial benefits and may even decrease efficiency of the service delivery. As Schmid (2003) underlines, service delivery in cases with characteristics similar to the education sector (e.g. foster care, adoption and home care services for the elderly) do not experience, or at least not always, efficiency gains from contractualization to a private organization. Such services are those for which political ideologies and moral values play the greatest role in public service delivery choices and, in some cases, the choice to externalize this typology of services is mainly driven by a political will clearly concerned with privatization, more than on intentionally rational decisions. Furthermore, Brown and Potoski (2003c) suggest that, when it is difficult to monitor or measure the performance of the service delivery, governments increase the use of joint contracting and internal service production. Even if an efficiency deficit does occur, the risk of vendor opportunism frequently prevents outsourcing the service delivery or increases the costs of the ex-ante contract preparation and ex-post contract monitoring. Warner and Hedbon (2001) show that governments are still the dominant producers of public services in many municipal services. Governments rarely contract out when the service marketplace is characterized by a scarcity of vendors because of a high risk of vendor opportunism.
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Barbieri and Salvatore Incentives and authority types in public service delivery 361

When services are characterized by high political authority levels and the need for low-powered incentives, Figure 1 suggests that their delivery remains the responsibility of a public organization. Those are the typical services for which public provision is rarely questioned and that make the functioning of markets actually feasible. On one side it is not possible to contract out to private (and also non-profit) organizations because high-powered incentives are detrimental and, on the other side, a market does not exist or is inefficient. This situation may occur when the competition or the contestability in the market is insufficient. Moreover, a limited possibility to measure or observe the quality of the service delivery implies that the abuse of political authority can only be curbed by guaranteeing that the public organization maintains the responsibility for the service delivery. When services are characterized by high-powered incentives and high levels of political authority, Figure 1 suggests that they should be contracted out for delivery by private organizations. Brown and Potoski (2004a) show that, at least for easily measured services such as garbage collection, governments do not lose their managerial capacity even when privatizing (and subsidizing) the service delivery. On the contrary, governments can improve their steering skills: the rowing function is, in this case, played by the vendors. Brown and Potoski (2004b) also reveal that, in the case of refuse collection, public managers looking to improve service delivery must still manage the market and the network supporting it. Furthermore, splitting the contract for delivering smaller (but complete) services using multiple vendors is effective for the success of contracting out (Brown and Potoski, 2005). From an NIE perspective, this strategy improves the measurability of quality and costs and therefore moves the feasible governance forms towards the private side of the continuum. Much of the time, both public and private organizations contract out to private organizations only broadly specifying the quality standards of the service in the contract and not using financing schemes directly linked to some previously formalized performance measures in order to provide high-powered incentives. They do so to circumvent the difficulties of writing a formal contract specified ex ante in terms that can be verified ex post by the third party (such as a law court) and they substitute it with a relational contract based on outcomes that are only observed by the contracting parties ex post, and also on outcomes that are prohibitively costly to specify ex ante (Gibbons, 2005). In relational contracts the assessment of the performance is subjective (and not done according to quantitative measures to which the parties committed at the time of the initial contract), and the reward is mainly in the form of repeated inter actions (obtaining a new contract or renewing the one for the service in a competitive market where other providers could obtain the contract) and by increasing their reputation. The contestability of the market is a potential threat that there may be sufficient competition to ensure the high power of incentives even in cases when services are paid as a fixed amount to the contractor independently of the quantity and quality of the provision (e.g. blocked contracts). As mentioned, in the real world every contract has a degree of incompleteness since future contingencies can never be fully envisaged, but the quality of some services and their outcomes can be observed relatively easily during the contracting-out relationship or immediately afterwards, while the quality of other services may be difficult to assess even subjectively and ex post. Moreover, governments may prefer
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relational contracts even when it is feasible to set measurable standards because: (i)public missions are very broad and it is impossible to operationalize the entire scope and tasks; (ii) not all public needs can be fulfilled and it is politically inconvenient to rank priorities in the way that would be needed for complete end-based agreements; and (iii) complete end-based contracts would make ex-post public failures clearly visible (Longo, 2008). From the point of view of the model discussed here, relational contracts and intentionally complete and formal contracts are two different ways of managing a contracting-out relationship by observing the performance and providing correlated incentives. Finally, when services are characterized by high-powered incentives and low political authority, Figure 1 suggests that they should be privatized. Although privatization is not a form of contracting out, it could be explained as a special case of contracting out to the private sector where the high authority type level of the service allows the government to not finance a service but only to regulate its provision. The four service delivery choices presented in our research should be interpreted as a continuum in which the boundaries of the different options have to be carefully evaluated. As briefly discussed above, the degree of incentives or the authority type level of a service cannot always be defined without taking into consideration aspects that are only marginally economic. Values, ethical norms and political ideologies often influence service delivery mode decisions. On the other hand, the possibility of monitoring the contracts and evaluating the effective delivery of a service is frequently cited in the literature as crucial in the service delivery choice. Also in this case it is not possible to provide definitive conclusions: in many cases, the associated costs can cancel out the real degree of efficiency gain and respond to normative considerations. For instance, in practice, service delivery choices can be fluid: internal service delivery can later change to contract, and contracts can be internalized later (Brown et al., 2005; Hefetz and Warner, 2004). The previous service delivery mode affects the costs of switching to other modes in important ways. In addition, many diverse forms of contracting out can occur: network contracting with governments or public and semi-public agencies can increase the spread of information or stimulate market competition. The main limitation of this model stays in its NIE roots. These roots imply narrow assumptions of human rationality and the belief that inefficient governance arrangements will be substituted by superior governance arrangements (Williamson, 1985). Recognizing the limitedness of this approach, in this article, using insights from several streams of research such as transaction costs economics, incentives theory, property rights theory of the firm and the theory on the publicprivate distinction, two dimensions of services have been defined and the ability of organizations of different natures to provide the services varying in those two dimensions have been compared. This constitutes an attempt to systematize findings of different research domains in a model, taking into account the specificities of the public sector. This research might be useful not only in contributing to the academic debate about contracting out and the publicprivate distinction theory, but it can also provide insightful suggestions to practitioners, who daily face operational challenges. Further work should focus on a more in-depth study of the continuum of organizational forms used to deliver public sector services, and an empirical validation of our theoretical model across time, space and diverse services.
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