Franchising in Government: An Idea in Search of a Theory

  • Arie Halachmi


The products and services of government organizations are not subject to direct market competition. No competition exits for the market share of a Ministry of Foreign Affairs or for a nation’s Customs Service, nor would the public want to see any. However, without the discipline of competition, one must ask: “What is the motivation to keep overhead costs down?” Why should a government producer of goods or services strive to be efficient or effective? As a matter of fact, under many government systems the inefficient and the ineffective are rewarded with greater budgets and a larger work force. The repeated arguments of those who are critical of government operations from an economic point of view, like Niskanen (1971), add to those voices speaking in favor of privatization and contracting out. As illustrated by the various works of Savas (1987, 1992), public managers are asked to consider the claim that competition is a key to efficient and effective government. However, as will be pointed out in this paper, the practical and pragmatic elegance of new administrative arrangements — which on the face of it seem to comply with assertions offered by Savas (1987, 1992) (e.g., about the functional role of competition) and Niskanen (1971) (e.g., about the budget-maximizing bureaucrat) — have yet to be tested within the theoretical frameworks offered by neo-institutional economics, Principal-Agent theory (Neelen 1993), being one of the themes.


Agency Cost Private Provider Government Operation Contractual Relationship Service Recipient 
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© Springer Science+Business Media Dordrecht 1998

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  • Arie Halachmi

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