8
software specifically designed to perform certain functions, tend to benefit the first
rounder or existing provider in the bidding process, because of the high barrier to initial
entry into the market, and tend to provide incumbent providers with monopolistic
bargaining power in subsequent rounds of procurement negotiations. Monopolistic
contracting environments increase transaction costs for local governments because
monopolistic power gives the providers more chance to behave opportunistically.
“Metering” refers to the degree of difficulty associated with measuring outputs
and monitoring whether contractors comply with contract requirements and accomplish
contract goals. Difficult-to- measure services increase transaction costs to local
governments because governments cannot effectively assess whether, and to what extent,
vendors hide their true performa nce, thus maximizing the potential for opportunistic
behavior on the part of contractors. Brown and Potoski (2001) define four different types
of services based on these criteria: meterable market services, meterable monopoly
services, non-meterable market services, and non- meterable monopoly services.
Meterable market services are most likely to be privatized because they do not
require high levels of specialized technical, labor, or capital investments and their
outcomes are easily evaluated. Brown and Potoski (2001) predict the favored production
mechanism for meterable market services will be contracting. Since privatization
provides a good fit to these services, we also expect low levels of vertical integration. At
the other extreme, non- meterable monopoly services are not only difficult to evaluate, but
require high asset specificity. Brown and Potoski (2001) hypothesize that these services
are the least likely to be privatized. If they are privatized, we expect to see more vertical
integration. Non- meterable market services and meterable monopoly services occupy
Convention