Arm's length delegation of public services

Delegation is a key feature of political decision making: Mayors or prime ministers delegate to subordinates, voters delegate to elected representatives. We analyze the effect of political delegation on public service provision and the choice between private or public providers when contracts are incomplete and incentives therefore distorted. We identify two important effects: The incentive effect increases the incentive part of service providers' remuneration and delegation may therefore be a substitute for an explicit complete incentive contract. The bargaining effect improves the bargaining position vis a vis a private firm with market power. In general, these effects imply that delegation improves public service provision.

Research Highlights► We consider outsourcing vs inhouse production of public services. ► We assume that contracts are incomplete and incentives therefore distorted. ► We model delegation of the crucial political decisions. ► We find two important effects of delegation: The incentive and bargaining effects. ► In general, these effects imply that delegation improves public service provision.