Does Organizational Performance Feedback Affect Public Service Outsourcing?

Abstract

Public service organizations are often put under performance-based accountability systems that offer organizational performance feedback. We examine whether and when public organizations use outsourcing to respond to negative performance feedback. Outsourcing can be a tool to improve future performance or escape accountability pressure. Further, public organizations with lower organizational capacity are more likely to outsource because they possess fewer resources to meet performance gaps through in-house production. Using data from the Financial Integrity Rating System of Texas, we conduct a regression discontinuity analysis of the impact of a lower performance rating on school districts’ outsourcing. The results show that negative feedback increases the proportion of district expenditure on outsourcing. The effects are stronger for the districts with smaller tax bases and staff sizes. Performance-based accountability systems move public organizations toward greater use of outsourcing through negative performance feedback.