Is buying cheaper than sharing? A study of the effect stand-alone contracting out versus public co-production has on cost in Norwegian local auditing services

Abstract

Contracting out and public co-production are widely used alternatives supplementing inhouse service delivery with aims to decrease costs. Scholars struggle however with establishing causal relationships comparing how these alternatives affect performance. This paper analyzes the effects outsourcing and intermunicipal cooperation has on costs, using Norwegian local auditing services as case. We set out to determine how organisation, in the form of single municipalities contracting out versus intermunicipal production, and the size of the cooperation (i.e. number of cooperating municipalities) affect costs. The results indicate that under competitive market conditions, cooperation in general is more costly than contracting out to private actors. However, when it comes to cooperation size, the results show that costs decrease when more members are included, indicating that smaller cooperations are more costly than larger ones. This indicates that an increase in cooperation size creates significant returns to scale.

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