Transaction Costs Explanations for Proxy Monitoring in Municipal Services Contracting

There is a vast, and expanding, literature concerning public services contracting. This growing body of scholarship often examines governments’ decisions to outsource service production, as well as the resulting relationships and service outcomes. In the context of local government outsourcing contract management is becoming increasingly important. Holding vendors accountable for service delivery and outcomes is essential in an era of third-party governance. Contract oversight, and monitoring, in particular is highlighted as an essential mechanism. Yet, it is often unclear what monitoring tasks are performed, and who in the contractual relationship is responsible for these tasks. I theorize that, outsourcing high transaction costs services is associated with greater reliance on proxy monitoring when compared to direct government oversight. The characteristics of the outsourced service can create a range of government-vendor relationships, and this is true for monitoring tasks as well. Using data from Florida municipalities I examine the impact of services’ transaction costs on the likelihood public managers rely on proxy monitoring rather than direct government oversight for nine monitoring tasks. I use two-stage Heckman selection estimation to analyze an original dataset of municipal services. The results suggest that, when local governments outsource services that are both asset specific and difficult to measure the reliance on proxy monitoring for some oversight tasks is greater when compared to direct government monitoring.