Bureaucratic Inefficiency: Failure to Capture the Efficiencies of Outsourcing

This paper analyzes the political economy ofoutsourcing by 16 federal bureaus during 1981-96. Inan era of restricted budgets and budget balancing, thepaper questions why federal bureaus did not exploitfully the efficiencies of outsourcing. It proves thatfederal bureaus can achieve technical and costefficiency through outsourcing when contracts can benearly fully specified. Federal bureaus outsource byobtaining inputs to their production processes throughcontracts with competitive market producing units. Econometric results substantiate the hypothesis that``institutions matter,'' and reveal that bureausachieve varying levels of technical efficiency throughdifferent levels of outsourcing.