Purchasing Policy Advice: The Limits to Contracting Out

Throughout the OECD, governments have been contracting out an increasing range of goods and services. Against this background, this article outlines the case for, and assesses the merits of, placing the purchase of governmental policy advice on a more competitive basis. Two options are given particular attention: first, the creation of an internal market for policy advice within the public sector under which departments and other government agencies would tender to supply specific policy outputs; and second, a more radical option under which public and private sector organizations would compete for the contracts to supply governmental policy advice. Drawing on the insights of the new institutional economics, it is argued that neither option is likely to enhance the efficiency or effectiveness with which policy advice is produced, whether under conditions of short-term or long-term contracting. This is due to the likelihood of: only partial contestability (due, among other things, to asset specificity in the form of transaction-specific expertise and trust); a greater risk of opportunistic behavior by the suppliers of advice (and also, under some conditions, by the purchasers); higher agency costs and transaction costs; and greater problems with respect to horizontal and vertical policy coordination. Such considerations suggest that the widespread reliance of governments on relatively permanent advisory institutions and in-house expertise can be explained and justified on the same theoretical grounds that have prompted the contracting out of other publicly-funded goods and services.