The Budgetary Effects of Municipal Service Contracting: A Principal-Agent Explanation

Abstract

This study examines the spending and employment practices associated with service contracting. Specific attention is paid to the aggregate spending and employment levels of different contracting practices. A principal-agent model is offered and tested in which the decision to contract is mediated by the preferences of different actors in the policymaking process. Incentives for the use of a contract mode of production differ between mayors and bureau heads, producing an asymmetry between the spending and employment effects of contracting observed at the bureau and city level.

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