Institutional Ties, Transaction Costs, and External Service Production

Analyses of local government contracting increasingly focus on understanding how the transaction costs created by service attributes limit opportunities for external service production. However, the institutional collective action framework suggests that networks among local government actors help to offset these costs for intergovernmental contracting decisions. We use data describing service production arrangements of cities in Michigan to examine the proposition that service production decisions are conditioned by the communication networks created through institutional linkages in addition to the transaction characteristics of services. We examine three different production options: (1) internal production, (2) joint or complete contracting with another government, and (3) production by a private or nonprofit organization, and find strong support for the expected role of transaction costs in these production choices. We also find that some types of networks created by institutions increase the likelihood that local governments will rely on intergovernmental service arrangements.