Public-sector outsourcing is distinct from privatization: the desirability of outsourcing in the provision of public services

The desirability of outsourcing the provision of public services depends on their characteristics and market conditions.

This sentence is made by Panu Poutvaara from IZA World of Labor who recently has published an article about public sector outsourcing.

Pros:

• The competition effects of privatization make private provision more efficient than public provision.
• Outsourcing public services can lower costs and increase consumer choice.
• Competition in service provision stimulates innovation, and more efficient use of resources.

Cons:

• Private-sector cost minimization efforts risk worsening the quality of public services, depending on the type of service outsourced.
• Some public-sector employees may lose their jobs.
• Natural monopolies cannot be privatized without risking a hold-up problem or corruption.

What happen within health care sector?

The health sector picture is more complicated.

• Adverse selection is particularly strong in the health sector, and information asymmetries are arguably higher in the health sector than in other sectors like education. Outsourcing to private institutions could lead to the exclusion of the sickest individuals in an effort to reduce costs. 
• Public competition by comparison:

1. The introduction of patient choice triggers a change in the choice of hospitals, with patients choosing higher-quality hospitals as measured by the mortality rate for heart-attack patients
2. Hospitals facing more competition due to lower market concentration shows an increase in quality without an increase in cost. 

Taking to account for those who likes to confound apples with pears

Public-sector outsourcing is distinct from privatization.

• Outsourcing, broadly defined, entails the private-sector provision of public goods or services under procurement contracts or vouchers that offer consumers of public services a choice of private-sector providers.
• Privatization entails the sale or other transfer of ownership of a public business or entity to a private entity.

Access to the article

IZA World of Labor is a private independent nonprofit economic research institute that analyzes global labor market using evidence based information.

photo: banksy 
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