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AbstractWhether governments pay more than firms when contracting has been an important and stubbornly vexing question in public management. One challenge has been finding ways to credibly compare the costs of engaging in market transactions with governments versus firms. In this paper, we systematically compare the costs of contracting when governments and firms buy the same product under the same circumstances. Using data from a randomized experiment of Danish firms, we examine selling firms' transaction cost expenditures when selling the same product to governments and other firms. We find that firms estimate spending about 34 percent more on transaction cost expenditures when selling to governments than when selling the same product to firms. Experience in selling to governments is associated with lower transaction cost expenditures, suggesting that learning can reduce firms' costs of selling to governments and firms.

When a product is difficult to specify in a contract and requires specialized investments for a market exchange, the buyer and seller can find themselves locked into a mutually dependent relationship in which both win-win and lose-lose outcomes are possible. This paper presents a theory of such complex contracting in the public sector and identifies the conditions that increase the likelihood of win-win outcomes for the buyer and the seller. Rules that allow parties to incentivize cooperative behavior increase the chances of a winning outcome. Relationships can promote cooperation if structured to incorporate repeated play and external reputations. Finally, contract success is contingent on mutual understanding between the two parties. Both the buyer and the seller need to understand the rules and the relationship in the same way in order for the exchange to deliver a win-win.

AbstractGovernments at all levels buy mission‐critical goods and services whose attributes and performance requirements are hard to define and produce. Many governments—and the public managers who lead them—lack experience and knowledge about how to contract for complex products. The contract management counsel provided to public managers is thin. Missing is a conceptual managerial framework to guide purchasing the complex products that are often so critical to public organizations' core missions. Drawing on perspectives from across the social sciences, the framework presented in this article provides guidance on how managers can harness the upsides of complex contracting while avoiding its pitfalls. The framework helps identify conditions that increase the likelihood of positive outcomes for the purchasing government and the vendor—the win‐win. To illustrate the framework, the article provides examples of successful and failed acquisitions for complex products such as transportation projects, social service systems, and information technology systems.

A fundamental source of contracting failure is product uncertainty. When the product's cost, quality, and quantity cannot be easily defined, buyers and sellers are unable to clearly and completely define exchange terms. The risk is that the buyer is the only purchaser of this "complex product," and once the contract is let, the vendor is the only supplier. The consequence is a collective action problem in which each party has incentives to exploit contract ambiguities for their own gain at the other's expense. We lay out the theoretical case for how complex contracting risks collective action problems. We then illustrate the theory's analytic value with the case of the Coast Guard's controversial Deepwater project, a major acquisition program to upgrade and integrate its fleet of air and sea assets. Through this case, we show how managing the state of agents requires understanding how different principal-agent relations' work. Adapted from the source document.

Public managers and their political overseers can choose from several approaches as they decide how to structure the delivery of goods and services to citizens. The three most common service-delivery modes are: internal service delivery, in which the government produces the entire service; contracts with other governments, private firms, or nonprofit organizations; and joint service-delivery arrangements. Traditionally, governments' decision to 'make or buy' has been framed statically: public managers and their political overseers select one delivery mode over alternatives and then remain committed to that delivery approach. Of course, in practice, service-delivery choices can be more fluid: internal service delivery can later change to contracts, and contracts can later be internalized. Changing service-delivery modes is a potentially costly undertaking. Governments that elect to switch typically make changes to existing production systems and management systems. Varying costs associated with the alteration of existing production and management systems make switching from some modes of service delivery easier than others, depending in part on how the service was initially delivered. In general, the costs of changing from direct service delivery to contract service delivery are likely to be high: managers have to dedicate significant time and effort to dismantling existing production and management systems and building new ones. On the other hand, the service-delivery decisions of contracting governments are likely to be more dynamic because they have typically already incurred the costs of changing at a previous date. Sometimes governments internalize services when they have been using joint or contracted service delivery, whereas at other times they remain in the market by switching vendor type. In this paper we examine how governments' previous service-delivery choices structure their future choices. We analyze panel data from the 1992 and 1997 International City/County Manager Association's Alternative Service Delivery surveys along with data from the US Census and other sources. Our results suggest that service-delivery choices exhibit strong inertia, although when change occurs the previous service-delivery mode influences the likelihood of changing to other service-delivery modes in important ways. In general, governments which have already internalized the upfront costs of changing modes of service delivery are more likely to approach service-delivery choices more dynamically in future decision making.