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Measuring and Managing Ex Ante Transaction Costs in Public Sector Contracting
Author(s) -
Petersen Ole Helby,
Baekkeskov Erik,
Potoski Matthew,
Brown Trevor L.
Publication year - 2019
Publication title -
public administration review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.721
H-Index - 139
eISSN - 1540-6210
pISSN - 0033-3352
DOI - 10.1111/puar.13048
Subject(s) - transaction cost , ex ante , business , database transaction , government (linguistics) , public sector , economics , industrial organization , finance , linguistics , philosophy , economy , computer science , macroeconomics , programming language
Transaction cost attributes, such as the complexity of the product being purchased, shape the risk that government contracts will fail. When transaction cost risks are particularly strong, a common prescription is to avoid contracting altogether or, if it is unavoidable, to spend additional resources on contract management activities. This article presents evidence on the size and variability of governments' ex ante transaction cost spending, using original data from 72 contracts issued by 47 Danish local governments. Ex ante transaction costs average 2.7 percent per contract and are relatively higher when services are more complex and lower when governments have prior contracting experience and contracts were larger. The analyses suggest the importance of distinguishing between transaction cost attributes and governments' choices to spend resources in response to them. Effective management spending in the face of transaction costs can help governments organize and capture value from contracting with private businesses .