Contracting Out Public Service Provision to Not-for-Profit Firms

In an incomplete contract setting, we analyze the contracting out of public service provision, comparing the performance of for-profit and not-for-profit firms (NPs). Two institutional arrangements are considered, with control rights lying either with the firm (quot;PPPquot;) or the government (quot;traditional procurementquot;). The use of an NP with traditional procurement is found never to be the preferred option in terms of social welfare. But for a range of parameter values an NP in a PPP is the preferred option. The development of PPP provision has thus created opportunities for the advantageous use of NPs in public services