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Vertical Integration in Municipal Service Provision
The question of how service characteristics and political institutions influence
local government service delivery has been extensively explored in research on
contracting and privatization. Much of this work provides support for the idea that goods
and services with low transaction costs and less subject to market failures are likely to be
privatized. Governments tend to rely on in- house service production when services are
difficult to measure, require highly specialized investments, or have important
distributional goals (Ferris and Graddy 1986; Brown and Potoski 2003a, 2003b, 2003c).
Thus existing studies match production arrangements to the characteristics or “type” of
service.
We extend this approach to investigate vertical integration in local services.
While the trend toward contracting out services continues, many services have been kept
in- house and others that have been contracted in the past have been moved back in-house
(Lamothe and Lamothe 2005). Despite the significance of this phenomenon for local
service provision arrangements and theories of local governance, it has received little
scholarly attention.
The recent work by Hefetz and Warner (2004) is the first to explore local
governments’ decisions to move previously contacted services in- house. While they
present a useful framework to examine this phenomenon, they do not provide a theory to
explain the decisions to internalize services after contracting. This paper builds on this
work and the literature on contracting decisions to develop and test a theory of vertical
integration in municipal service provision. We view the vertical integration of services
as more than the reverse of contracting out; it is the product of three distinct types of
Convention