Outsourcing, Market Structure and Elections

We make a positive analysis of the impact of market structure and political preferences on a (local) government's decision to privatize a given service using the framework of Hart, Shleifer and Vishny (1997). We argue that although outsourcing is more attractive when the private market is competitive, the outsourcing decision will be the same in a competitive and a monopolistic market. Second, we analyze how the price paid for the public service in a monopoly market depends on how much the government cares for the benefits of the public service, and we provide conditions for when a leftist, "public service loving" politician outsources to a lower price. When this is the case and outsourcing is the salient issue in an election, the median voter prefers a more leftist government to implement the outsourcing.