Working Paper: NBER ID: w21837
Authors: Abhijit Banerjee; Rema Hanna; Jordan C. Kyle; Benjamin A. Olken; Sudarno Sumarto
Abstract: Outsourcing government service provision to private firms can improve efficiency and reduce rents, but there are risks that non-contractible quality will decline and that reform could be blocked by vested interests exactly where potential gains are greatest. We examine these issues by conducting a randomized field experiment in 572 Indonesian localities in which a procurement process was introduced that allowed citizens to bid to take over the implementation of a subsidized rice distribution program. This led 17 percent of treated locations to switch distributors. Introducing the possibility of outsourcing led to a 4.6 percent reduction in the markup paid by households. Quality did not suffer and, if anything, households reported the quality of the rice improved. Bidding committees may have avoided quality problems by choosing bidders who had relevant experience as traders, even if they proposed slightly higher prices. Mandating higher levels of competition by encouraging additional bidders further reduced prices. We document offsetting effects of having high rents at baseline: when the initial price charged was high and when baseline satisfaction levels were low, entry was higher and committees were more likely to replace the status quo distributor; but, incumbents measured to be more dishonest on an experimental measure of cheating were also more likely to block the outsourcing process. We find no effect on price or quality of providing information about program functioning without the opportunity to privatize, implying that the observed effect was not solely due to increased transparency. On net, the results suggest that contracting out has the potential to improve performance, though the magnitude of the effects may be partially muted due to push back from powerful elites.
Keywords: outsourcing; service delivery; Indonesia; randomized field experiment; subsidized rice distribution
JEL Codes: D73; H57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of a procurement process allowing citizens to bid for the subsidized rice distribution (H57) | reduction in the markup paid by households (D19) |
| introduction of a procurement process allowing citizens to bid for the subsidized rice distribution (H57) | improvement in rice quality (Q16) |
| increased competition among bidders (D44) | reduction in the markup paid by households (D19) |
| higher levels of competition (L13) | further reduction in prices (D49) |
| introduction of a procurement process allowing citizens to bid for the subsidized rice distribution (H57) | significant drop in transportation costs (R41) |
| entrenched local elites could block the outsourcing process (L33) | limited potential gains from the reform (E69) |