Chapter 4
LEADERSHIP TURNOVER AND THE DELIVERY OF CITY SERVICES
One of the more controversial and contentious issues regarding municipal service
delivery in recent years is the decision to contract out, "privatize," or employ some other form of
external delivery of particular services. This mode of service delivery has been promoted as a
means of providing services more efficiently and effectively (see, e.g., Hanke 1987) and
sometimes as a way of providing services that otherwise could not be provided at all (DeHoog
1984). On the other hand, contracting out has been accused of providing services of lower
quality, of mistreating and/or exploiting government employees, and of denying constitutional
protections both to those who should receive government services and to those who deliver them
(Goodsell 1986; AFSCME 1977; Sullivan 1987; Moe 1987). With such different and strong
statements of both the empirical and normative implications of external service delivery, it is no
wonder that the topic has stirred up quite a political controversy.
We will not directly address this controversy, but instead examine how political and
administrative instability within cities affects the decision to deliver services indirectly. In doing
so we make the case that political turmoil, represented by leadership turnover, affects the costs of
negotiating, enacting, and enforcing the provisions of a contract or informal agreement between
government and an external supplier of a service.1 When such "transaction costs" rise too high,
we expect that either governments will not seek to contract out a service or they will be unable to
find an external supplier that will accept responsibility for a government service without
demanding an unacceptably high risk premium.
In the first section of this chapter we briefly survey prior research on the decision to
deliver services through an external provider. The second section discusses how political
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conflict can cause "privatization failure" (Sappington and Stiglitz 1987) because of the
uncertainty and opportunities for reneging on agreements that are afforded by rapid turnover
among the occupants of institutionally significant offices. In short, we argue that political
conditions may cause external delivery to become an inefficient and unpopular means of
providing services. This argument lies squarely in the tradition of transaction cost explanations
of vertical integration and contractual choices in private firms. We next discuss a quite different
argument about the implications of political conflict derived from the research on legislative
delegation of policymaking authority to bureaucratic agencies. The third section describes a test
of a model of municipal service decisions using data derived primarily from the International
City Management Association's 1988 survey of government service delivery patterns. We
conclude by discussing the implications of that analysis.
SERVICE DELIVERY DECISIONS
Advocates of privatization have long argued that governments can provide services more
cheaply through private providers than through direct in-house delivery. This advantage is said
to derive from the motivation induced by a competitive market, profit motives, the less restrictive
managerial and personnel practices in the private sector, and the lower labor costs generally
found for unskilled and semi-skilled labor outside of government. Critics of privatization have
questioned this general argument (see, e.g., Boyne 1998) but some studies have found that for
several local government services, contracting out is less costly than direct government delivery.2
In light of this, it is not surprising that fiscal considerations seem to be among the most
important factors in determining whether local governments contract out services. Research by
Ferris and Graddy (1986) and Morgan and Hirlinger (1988), for example, indicates that wage
differences between the public sector and private service workers within a local labor market are
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strong predictors of contracting decisions.3 Tax and expenditure limitations and heavy tax
burdens also appear to lead municipalities to try contracting alternatives rather than to provide
services directly. When state governments centralize control over spending for public services,
local governments may rely upon external suppliers for services for which the state has not
assumed responsibility (Stein 1990: Chapter 4).
Considerable research has also found that external service delivery decisions are greatly
influenced by the political pressure of particular interests and groups within the community. To
no one's surprise, government workers whose jobs might be threatened by external suppliers of
services have often opposed privatization plans. Empirical research demonstrates that those
efforts have often been successful. The number of municipal employees appears strongly related
to direct government delivery of services (see, e.g., Ferris and Graddy 1986; Morgan and
Hirlinger 1988; Stein 1990). Union pressure, however, seems relatively unimportant after taking
into account the size of the public workforce. Possibly strong municipal unions lead to "labor
market turmoil" which may increase the incentive for city hall to contract with more reliable or
compliant private providers of services (McGuire, Ohsfeldt, and van Cott 1987).
Political pressure at one point in time may be largely a function of historical factors that
affect the number and kind of services provided by municipal governments. Borrowing from an
argument by R. D. Norton (1979), Stein (1990) argues that older American cities have had more
time to develop organized interests that become claimants upon local governments. Over time,
providing greater and greater numbers of services demanded by different factions will mitigate
conflicts among contending organized groups. This puts greater fiscal strain upon older cities,
especially when they are restricted by annexation laws from expanding their property tax bases.
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Under these conditions, Stein argues that older cities will resort to non-direct modes of service
delivery as a way to provide services that otherwise they could not afford.
Some researchers have also found that governmental characteristics affect contracting
decisions, at least for particular services. The council-manager form of government, for
example, has been found to be associated with contracting out public health services (Ferris and
Graddy 1987) and public transit (McGuire, Ohsfeldt, and van Cott 1987), even though form of
government does not seem related to general indices of overall contracting.
Several reasons for this effect of local government form have been suggested. City
managers may have a greater predisposition toward policy innovation than mayors or their
appointees may have. Government employee unions and their supporters on city councils may
have little influence upon managers (cf. Mladenka 1991). Efficiency may also be a more
important goal, relative to other priorities, for city managers than for elected officials. Finally,
city managers are aware that their careers may be advanced if they are successful in terms of
financial management and efficient administration. Even if their accomplishments with respect
to those criteria are not appreciated by the council of the city in which they work, managers
know that other city governments will be favorably impressed and may seek to hire them at
higher salaries (Stein 1990).
Transaction Costs and Municipal Service Delivery Decisions
The question of whether private firms should contract out for products or services or
provide them internally (i.e., become more vertically integrated) has been a topic that has
concerned economists for many years. Beginning with Coase (1937) the predominant
explanations for vertical integration in the private sector all stress the concept of transaction
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costs, the costs incurred in negotiating, monitoring, and enforcing a transaction, contract, or
agreement. When such costs are high, many economists suggest that firms have an incentive to
provide services and products themselves, rather than seek out external suppliers.
Political scientists are just beginning to apply transaction cost arguments to the issue of
contracting out of services in the public sector. Robert Stein (1990), for example, has applied
Oliver Williamson's (1975; 1985) arguments about transaction costs to municipal service
delivery choices. Williamson has long argued, inter alia, that firms will become vertically
integrated in order to control valuable specific assets which might be lost if outside suppliers
reneged on a contractual agreement or at least re-interpreted a contract in a way detrimental to
the interests of the firm.4 In applying this idea to municipal contracting decisions, Stein
suggests that certain kinds of municipal services, especially those providing collective goods
(e.g., street cleaning, crime prevention, building inspection, and code enforcement) and common
property goods (e.g., emergency medical services, ambulance services), make use of the kind of
specific capital assets that concern Williamson. While Williamson suggests that asset specificity
should be expected to result in vertical integration, Stein finds that municipalities will directly
provide services that resemble collective and common property goods but will use a diverse
array of service arrangements--including joint contracting and complete contracting with external
suppliers--to provide services resembling toll goods and private goods.
While Stein emphasized the importance of the asset specificity of certain service
characteristics, we focus upon the transaction cost implications of local politics. Specifically, we
are concerned with how turnover in leadership positions in city government affects the ability of
the municipality to negotiate contracts, make credible commitments to suppliers, and faithfully
uphold and enforce contracts and other agreements once they are in force. Our work presumes
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that external service delivery is most likely when both parties to the agreement--the municipality
and the external supplier (which may be a firm, non-profit organization, or another government)-consider the deal in their best interest. This is most likely when the parties to the exchange are
relatively far-sighted and when contracts provide for penalties for noncompliance and incentives
for faithful compliance. Such provisions may make commitments to the agreement credible,
even without reliance upon third parties (e.g., arbitration boards, courts) to enforce the contract
(see Williamson 1975: Chapters 7-8). However, the deal is not likely to be made when either
side suspects that the terms of the contract will not be upheld, either because the parties have
short time horizons and/or because the contract fails to commit valued assets to ensure
compliance. This suspicion may prevent service agreements that otherwise would be mutually
advantageous.
From the standpoint of the external supplier of a service, uncertainty regarding a city's
future expectations, bid specifications, appeals policies, and preferences regarding service
delivery can make doing business with governments very undesirable (MacManus 1991). Such
uncertainty is likely to increase as the level of political conflict within a city increases. Elected
officials who are wary of displeasing contending interest group coalitions or fickle alliances of
constituents may not be able to make credible commitments to contractors. New leaders who
come into office during the life of a contract or service arrangement may not be satisfied with the
provisions of the agreement and may wish to re-negotiate or re-interpret its terms. Centralized
organizations of all types are distinguished by the broad powers of executives to intervene in
lower-level decisions (Milgrom and Roberts 1990). Turnover among executives should be
expected to lead to less consistent organizational outcomes (Finkelstein and Hambrick 1990).
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This may be particularly true of political organizations headed by officials who must periodically
stand for election.
Incumbent government leaders themselves may not be willing to enter into any
agreements for a significant period of time that would lock them in to a particular mode of
service delivery that would specify explicit quantities of service, quality characteristics, or
distributive criteria. More open-ended and flexible contracts that would enable governments to
modify service provisions could be considered, but suppliers could demand substantial premia
for accepting these possible interventions. If so, the cost savings that contracting out is often
said to provide could quickly evaporate (Sappington and Stiglitz 1987; cf. Goldberg 1976;
Williamson 1976). Under these conditions, external service delivery may not be very likely.
Political conflict and its resulting uncertainty might lead governments to give up direct,
hands-on control of certain programs, if we assume that governments may be willing to pay
suppliers for the uncertainty that accompanies the political climate or if we assume that suppliers
do not consider political turmoil to have much effect upon the city's commitment to its contracts.
It is also likely that government leaders may prefer to deliver services externally when
subordinates within agencies are attempting to influence their organizations in ways contrary to
the directives of their superiors. In these instances, the transaction costs involved in preventing
this unwanted influence through centralized control may be greater than having services carried
out externally (Milgrom and Roberts 1990).
Turnover among elected or appointed officials could offer opportunities for other
officials to make policy choices that would not be approved if given closer scrutiny by more
experienced personnel.
External delivery choices, for example, might be decisions that could
be made by decisive mayors while turnover was prevalent on the city council. Principal-
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agent theorists have long argued that in many kinds of relationships opportunistic behavior may
occur when monitoring costs are high and when asymmetries of information are significant. In
the case of many government decisions, council members act as multiple principals, while
administrators, city employees, and sometimes even mayors may act as agents in the sense that
they execute policies authorized by the lawmaking body. Possibly significant new innovations
can be adopted and implemented when the membership of that lawmaking body is in flux.
Another kind of conflict-driven argument is raised in the political science literature on
legislative delegation of policymaking authority to administrative agencies. Fiorina (1982),
McCubbins (1985), and McCubbins, Noll, and Weingast (1989) have all suggested that reelection seeking legislators, under conditions of great political conflict, may make vague
delegations of policymaking authority to bureaucracies so that they can avoid the blame for
controversial decisions.5 These scholars do not argue that legislators have abdicated all policy
control, but instead say that legislators may later intervene in many ways to shape the content of
administrative decisions as legislators learn the implications of those choices. If this perspective
were applied to municipal service delivery alternatives, one might argue that political conflict
would encourage incumbent elected officials to detach themselves from hands-on control of the
day-to-day activities involved in delivering a particular service.
ANALYSIS OF CONTRACTING
In order to examine how political conflict affects service delivery decisions we have
made use of the ICMA's 1988 Profile of Alternative Service Delivery Approaches. This data set
is derived from survey responses from city officials regarding whether or not particular services
were provided by the respondent's municipality and, if so, how these services were delivered
(i.e., directly, completely through contracting, joint contracting, etc.). For our purposes, only
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responses from cities with 1985 populations of 25,000 or more were included in the sample.
Obviously, the results of the analysis might be different if smaller communities were included
in the sample.
We use probit analysis to estimate the likelihood that a city will contract with an external
provider to provide forty-three different public services.6 The dependent variable was estimated
with a model that included independent variables representing turnover in both the office of
mayor and the chief administrator (often a city manager, sometimes an appointee of the mayor)
between 1983 and 1988. The score recorded in the data set represents the number of changes
between 1983 and 1988 as reported in the Municipal Yearbook. The model also includes
variables for city population size in 1985 (U.S. Census 1985), location within a metropolitan area
(ICMA 1981), council-manager form of government (ICMA 1988), number of listed municipal
services offered by the city (ICMA 1988), state centralization (Stephens 1992), annexation
authority7 (Advisory Commission on Intergovernmental Relations 1993), whether or not the city
was a part of a recognized metropolitan area in 1929 (Bogue 1953; Norton 1979), full-timeequivalent public employees per 10,000 population (U.S. Census 1988), and percentage of the
municipal workforce unionized (U.S. Census 1988).
The results of these analyses are reported in six separate tables. The first table reports the
results of models estimating the probability of the external delivery of regulatory services (i.e.,
sanitary inspection, insect and rodent control, animal control, operation of animal shelters,
inspection/code enforcement). These are fairly labor-intensive services that are intended to
mitigate particular externality problems common to most communities. The second table reports
estimates of external delivery of recreational and cultural facilities (i.e., recreation services,
operation and maintenance of recreation facilities, parks landscaping and maintenance, operation
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of convention centers and auditoriums, operation of cultural and arts programs, operation of
libraries, operation of museums). This category of services includes both labor-intensive and
capital-intensive services. One characteristic that all of these services have in common is that
their quality attributes are difficult to specify and measure. The third table reports estimates of
social services (i.e., operation of care facilities, programs for the elderly operation of
public/elderly housing, public health programs). These are largely redistributive programs
serving particular target populations. These services may also have quality measures that are
difficult to define and measure.
Table 4.4 reports estimates for the external delivery of
housekeeping services (i.e., building security, payroll, tax bill processing, data processing,
delinquent tax collection, title record/plat map maintenance, legal services, secretarial services,
and personnel services). Most of these are relatively straightforward, professional services in
which a number of private, profit-seeking firms are present. Table 4.5 reports estimates of the
external delivery of public works services (i.e., residential solid waste collection, commercial
solid waste collection, solid waste disposal, street repair, street/parking lot cleaning, snow
plowing and sanding, traffic sign/signal installation and maintenance, buildings and grounds
maintenance, tree trimming and plotting on public rights of way, operation of parking lots and
garages, operation and maintenance of bus transit systems). Some of these functions are capitalintensive, others are labor-intensive, but all have relatively straightforward quality and quantity
dimensions that can be specified in contracts. This feature may greatly reduce transaction costs,
ceteris paribus (Barzel 1982). The sixth and final table reports estimates of the external
delivery of emergency protective services (i.e., prisons and jails, crime prevention and patrol,
police/fire communications, fire prevention and suppression, emergency medical service, and
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ambulance service). These are traditionally governmental functions that often involve life and
death situations. The quality and quantity of these services is inherently difficult to specify.
TABLES 4.1-4.6 here
Tables 4.1-4.6 report probit estimates for the likelihood of external delivery for
regulatory services, recreational and cultural facilities, social services, housekeeping services,
public works, and protective services. There is evidence that mayoral and/or administrative
turnover influences the probability of external delivery of one or more services in each category.
Only the total number of services provided was a more consistent predictor of external delivery.
The probability of external delivery of almost any service increases as the total number of
services provided by the city services. This is the most robust finding in the analysis and is
consistent with the developmental argument by Stein that suggests that over time the number and
diversity of services offered by a city grows but the fiscal strain imposed by those new services
encourages the city to try new delivery alternatives, including external contracting (1990). City
age (within a metropolitan area) and annexation authority also affect service delivery decisions,
just as Stein argued. Municipal unionization discourages external delivery of a few services, just
as the conventional wisdom would predict. But unionization increases the chances that the city
will contract out for solid waste disposal and street repair. This appears consistent with the
“labor market turmoil” thesis (McGuire, Ohsfeldt, and van Cott 1987). Public employment, as
expected, is negatively related to the external delivery of most services.
Closer examination of the influences of turnover on external delivery reveals support for
both the transaction cost and legislative delegation explanations. The effects of mayoral and
administrative turnover are quite different. Administrative turnover generally reduces the
likelihood of external delivery. In many instances, particularly relating to housekeeping services
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and public works, administrative turnover discourages use of external suppliers, just as the
transaction cost argument would have us expect (see Tables 4.4 and 4.5).
Turnover among elected executives, on the other hand, increases the likelihood of
external delivery of many services. Mayoral turnover appears to encourage contracting with
external suppliers, especially with regard to regulatory and housekeeping services (see Tables 4.1
and 4.4). These results are consistent with the arguments that politicians delegate authority to
avoid the political fallout from controversial decisions. It also appears consistent with prior
research indicating that competitive mayoral elections encourage the emergence of
entrepreneurial politicians (Teske and Schneider 1994). Another possibility is that newly elected
mayors come to office with a commitment to change service delivery policies, and that external
delivery decisions are just one way of delivering on those promises.
The differing effects of administrative and mayoral turnover are certainly plausible.
Firms that might wish to do business with the city may be most concerned about instability in the
office of administrators with whom they actually negotiate and who will be responsible for
monitoring contractual compliance. They may care most about control of the mayor's office
when turnover in that position is accompanied by significant policy changes, at which time there
would also probably be turnover in administrative positions. In conflictual situations represented
by mayoral turnover, elected officials might have an interest in shedding day-to-day concerns
with many public services.
Other concerns might be more important, and cost savings could
conceivably be realized through contracting, if external suppliers do not demand substantial risk
premia in exchange for acceptance of a contract in a politically tumultuous city. Another
possible explanation is that when administrative turnover takes place, particularly in the wake of
controversy or scandal, new administrators are reluctant to propose or support a great number of
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innovations, including external service delivery, until they have settled into their jobs and had
time to study their options closely.
A few services are exceptions to this general pattern. External delivery of bus transit
service, for example, seems to be discouraged by mayoral turnover but encouraged by
administrative turnover. Non-direct delivery of a few of the social services (e.g., operation of
day care facilities, programs for the elderly, operation of public and/or elderly housing) also
seem to be discouraged by mayoral turnover. Perhaps these issues are so sensitive in many cities
that political conflict often forces politicians to retain hands-on control. Each policy is probably
fairly labor intensive and has constituent and provider interests that are fairly well-defined. The
policies may have quality dimensions, however, that are difficult to define and measure, which
may cause problems in contractual specification (see Barzel 1982). In contrast, the services for
which non-direct delivery is encouraged by mayoral turnover tend to be those that are either
capital intensive, public works programs, regulatory functions, or staff support sorts of services.
These services may have less distinct clienteles and less overt controversy. They may also
produce outputs that are reasonably easy to identify and measure.
In addition to bus transit services, administrative turnover appears positively related to
non-direct delivery of convention center and auditorium operations and the running of libraries.
This is counter to the general argument, but in all three cases the sort of non-direct delivery that
is involved is frequently handled by another government, often a special district or public
authority. Formal contracts may not exist between the city and the governing body delivering
those services, so contractual breakdowns would not be induced by turnover among city
administrative personnel.
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DISCUSSION
Prior research on external delivery of services treats these decisions as functions of two
discrete sets of factors. The first set deals with fiscal factors, suggesting that governments
contract out in order to achieve cost savings, relieve fiscal stress, and increase economic
efficiency. The other set of factors is political, implying that contracting is a result of weak
public employee organizations, conservative officeholders, self-promoting city managers, etc.
We have not disputed either kind of argument, but have instead argued that the political climates
of local governments have management impacts and economic implications that affect the
contracting decision. In fact, political factors may have effects not only upon the mode of
service delivery but also upon the efficiency of the mode chosen.
While empirical analysis cannot directly examine each component of the argument that
we have presented here, we have found some evidence consistent with the prediction of that
argument. Turnover among leadership positions in city government does seem to affect
contracting decisions, at least among cities of significant population size, but the effects vary
according to the type of position where turnover occurs and according to the kind of service
studied. Further examination of these varying effects is certainly warranted.
Also warranted is inquiry into how local leadership turnover affects policy choices
involving long-term obligations and future commitments. Capital planning, debt financing, and
public pension funding decisions all presuppose that municipalities have long time horizons.
This premise may not apply to cities experiencing great change in personnel within the mayor's
office and among chief administrative officers. The next chapter explores this issue.
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Table 4.1
Table 4.2
Table 4.3
Table 4.4
Table 4.5
Table 4.6
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