Productive Efficiency and Contract Management: Some Evidence From Public Transit Agencies

Abstract

This article examines a form of public production that contracts out the top Abstract management of the transit agency. This allows a test of Fama's conjecture that competition among managers, even when financial incentives are deferred, is sufficient to mitigate the principal-agency problem. Previous work has found little difference in cost and has concluded that the public versus contract management distinction is of little practical interest. This article demonstrates that, whereas total costs are similar, the input selection and input utilization decisions that lead to total cost are quite different between management types. This cost decomposition goes a long way toward describing how and why productive inefficiency occurs and what can be done to eliminate this inefficiency.