| Abstract: | The Hilmer reforms, and recent reports from the Industry Commission, advocate a significant shift toward competitive tendering for Australian public services. This article discusses the policy debate in the light of recent developments in the economic theory of contracts.
It will be argued that, although more intense competition can, on some occasions, generate apparent efficiency gains, it can also generate efficiency losses. Following Stigler, it will be argued that the general tendency for competition to generate cost reductions may be explained in terms of increased work intensity, and does not therefore involve a net social welfare gain. Such issues will be examined in relation to the Industry Commission (1995b) draft report on Competitive Tendering and Contracting by Public Sector Agencies, with particular attention to the issue of net social welfare benefits of contracting out. It is suggested that the Industry Commission estimates of efficiency gains available through contracting out are based on an incomplete sample, ignore the social transfer implied in reducing costs and are unlikely to hold for many sections of the public sector. |
