Assessing the Effects of User Accountability in Contracting Out

How does contracting out affect service performance? Evidence to date is mixed. We argue that this is partially due to prior studies focusing often on whether-not how-services are contracted. Yet, how services are contracted matters. In particular, we argue that whether users pay user fees for services to contractors affects efficiency. Where they do, contractor revenue depends on user satisfaction and contractors face incentives to provide quality services to users to retain revenue. Where, by contrast, governments fund services, information asymmetry about the quality of services users receive allows contractors to shirk quality. The assertion is substantiated by empirical evidence derived from a comprehensive analysis of conditional efficiency within the water supply services across 2,111 municipalities in Spain, employing a two-stage conditional order-m data panel estimation. Our results show that contracting out where users pay service fees and thus have incentives to hold contractors accountable outperforms contracting out without user fees in quality-adjusted service provision.