The Role of Power and Competition in Contracting Out

• Author: Suzanne Marie Leland,Olga V. Smirnova
• DOI: 10.1177/0095399713498748
• Published date: 01 May 2016
• Date: 01 May 2016
• Subject Matter: Articles

Administration & Society

2016, Vol. 48(4) 421 –443

© The Author(s) 2013

DOI: 10.1177/0095399713498748

aas.sagepub.com

Article

The Role of Power

and Competition in

Contracting Out: An

Analysis of Public

Transportation Markets

Olga V. Smirnova1 and Suzanne Marie Leland2

Abstract

Market forces provide a foundation for the expectations of efficiency in

contracting out. However, often the lack of competition in particular

industries creates powerful companies that are able to negotiate contracts

in their favor, reducing improved performance for government agencies.

To study how market power influences performance in service delivery

in the transit industry, we examine individual contracts as our unit of

analysis. We hypothesize that a vendor’s market power directly influences

an individual contract’s operational efficiency. We find that the lack of

competition in the execution of contracts is an important determinant of

agency performance.

Keywords

contracting out, public transportation, market power, performance,

contractual negotiations, benchmarking

1East Carolina University, Greenville, NC, USA

2University of North Carolina at Charlotte, NC, USA

Corresponding Author:

Suzanne Marie Leland, UNC Charlotte, 9201 University City Blvd., Charlotte, NC 28223,

USA.

Email: smleland@uncc.edu

498748AAS48410.1177/0095399713498748Administration & SocietySmirnova and Leland

research-article2013

422 Administration & Society 48(4)

Introduction

Like all government agencies during the recession, local transit agencies are

under tight budgetary constraints as tax revenues have steadily declined.

Therefore, any measure that targets cost-effectiveness becomes more and

more appealing to policymakers. Contracting out is no exception and is being

touted as a cutback management strategy for government agencies.

Competition and market forces provide the logical foundation for the expec-

tation of efficiency and effectiveness gains from contracting out services to

private vendors (Brown, Potoski, & Van Slyke, 2006; Savas, 1987, 2000,

2005; Van Slyke, 2003). However, in the case of local public transit provi-

sion, there is little empirical evidence over the last three decades that supports

the notion that contracting out for services obtains either of these two goals

(Leland & Smirnova, 2009; Perry & Babitsky, 1986; Zullo, 2008). Specifically,

Perry and Babitsky (1986) and Leland and Smirnova (2009) find that there is

little advantage in terms of efficiency and performance in contracting out

transit services over the past 25 years. Zullo (2008) also finds contracting out

for bus services did not yield any significant efficiency gains from 1993 to

2004.

These studies, however, do not closely examine the level of market com-

petition in the industry as the primary reason for why contracting does not

necessarily deliver on these promises. Chadwick (1859) and Demsetz (1968)

both assert that the determinants of competition in market negotiations differ

from and should not be confused with the determinants of the number of

firms from which production will issue after contractual negotiations take

place. Furthermore, Williamson (1975) argues that transaction cost econom-

ics should be extended and utilized to improve our understanding of market

competition. Therefore, in this study we explore the existing level of market

competition in the actual provision of services. Specifically, we look at how

the quantity of qualified vendors and their relative size of contracts influ-

ences cost savings and improved performance in public transit services. The

goal of this line of research is to provide the principal (government transit

agencies) with more information about how agents (transit vendors) operate

in the contracting marketplace to improve contracting practices.

We argue that in the tradition of Chadwick (1859), there is an important

difference between the level of competition in the bidding of services (among

private vendors) and the level of competition during the execution of a ser-

vice contract. The bidding process for transit services often takes place on a

national scale, where large private companies bid for different contracts,

while service provision actually occurs at the local level by cities, counties,

and special-purpose governments. On average, transit industry contracts are