Integrating Organizational Economics and Resource Dependence Theory to Explain the Persistence of Quasi Markets

Round 1

Reviewer 1 Report

Report on “ Integrating Organizational Economics and Resource  Dependence Theory to Explain the Persistence of  Quasi Markets” for Administrative Sciences (Manuscript ID: admsci-209366).

The key question the article is concerned with is why governments create quasi-markets, i.e. purchase services/goods from private sector firms. And why there is a mix of purchasing channels across different governmental institutions (i.e., why is it that the same service/good is sometimes made and sometimes bought by government).

To explain this, standard OrgEcon approaches are combined with resource dependence theory. I take some issue with how in the main part of the paper these OrgEcon approaches are described. It is claimed that OrgEcon would posit that the “buy” alternative would always be superior to the “make” option as private firms are necessarily more efficient than the government. This is false and only holds under specific assumptions. In fact, Hart et al, also cited in the paper, explicitly is concerned with one version of the make or buy decision in a governmental procurement context.

Then resource dependence theory is introduced. From what I took from the paper, the argument works as follows: Government contracts tend to be big and important to the contractors. Hence, the government can hold up the contractors by threatening to withdraw the contract. This interference then leads to firms being less efficient (as inefficient as the government would be). I am not convinced by this. First, I don’t see a difference between the government or any big firm procuring from contractors; there’s always going to be negotiations and renegotiations and potentially “interference” with the production process. This, primarily, seems to be a contractability issue rather than a private/public issue. Second, often times the government is not the only customer for the contractor or not even the biggest customer. This should also speak against a major independent role for resource dependence theory (or it would imply potentially testable implications if carefully modelled).

Finally, based on these thoughts, the suggested answer why we see quasi markets and mixed procurement channels across different governmental institutions is as follows:

Some governmental bodies make the mistake to fail to understand that ex-ante efficient firms will become inefficient with government contracts because of governmental intervention and some firms are willing to enter these procurement contracts as they fail to foresee governmental interference. So the world seems to be the outcome of a sequence of unfortunate mistakes. I find this utterly unconvincing.

Author Response

Admsci-209366 Response to Reviewer #1

We appreciate your thoughtful comments which helped us clarify our exposition.  We didn’t mean to say that organizational economics supported the idea that private production is always more efficient, but that it does imply that only in exceptional areas such as foreign affairs, the military, foreign intelligence and managing the money supply (Williamson, 199–cited on line 243) will government be more efficient.  That is, government efficiency in production is the exception, not the rule.  We’ve added two references for this, Shliefer, 1998 (cited on line 120) and the World Bank, 1995 (cited on line 123).  We also did not mean to imply that we think private production is always more efficient—we were just explaining how the topic was traditionally treated in organizational economics.  And, further, we point out that the theory isn’t complete without considering the consequences of resource dependency.  To be more clear, we made changes on lines 37-39, 87-91, 120-123, 175-177, 187-188.

Similarly, we appreciate your comments on resource dependence theory.  However, we don’t agree that there is no “difference between the government and any big firm procuring from contractors.”  Private firms don’t have the power to change the rules of the game in the way that government can and does.  Your second point “often times the government is not the only customer for contractor or not even the biggest customer” may be true depending on how you measure “often.”  But, in some big industries it isn’t true.  For example, the revenue streams of proprietary higher education firms are on average composed of 85% federal transfer payments.  And, the government recently changed the rules for for-profits schools.  To be more clear about this, we made changes to lines 412-417.

Finally, we didn’t mean to imply that quasi markets are “the outcome of a sequence of unfortunate mistakes.”  We offer an explanation of why both public and private production survives in these markets.  Firms that enter these markets to make a profit often do make a profit, but can be constrained by government regulations and therefore, not free to “maximize” profits in the way they could if they were not dependent on the government for their right to enter the market and for resource streams.  Governments will still want to open the markets to competition if they think that private firms will operate efficiently, knowing that they may have to inforce new rules if probity hazards manifest, or if their constituents make new quality demands. 

We did mean to imply that organizational economics was mistaken in not considering the role of resource dependence in modeling the efficiency of private firms producing public goods and that there are gains to integrating theories from different disciplines. Particularly, we think that resource dependence has some explanatory power with regard to efficiency.  

We appreciate the time and care you put into the consideration of our paper and hope that the changes we’ve made will meet with your approval.  We know that the paper is better because of your input. 

Reviewer 2 Report

This nicely written and though provoking paper considers the theoretical arguments for outsourcing or privatising public service delivery. In line with the current orthodoxy the paper suggests initial enthusiasm for the creation of quasi markets can be explained by traditional economic arguments focused on principal agent and property rights theory. Again largely in line with existing theory, the tendency for privatised or outsourced services not to deliver the promised efficiency gains despite in some cases compromising the quality of the delivered services, is explained by probity hazard and transaction cost theory.

The paper makes new theoretical claims when it uses power-dependence theory to explain the persistence of often relatively small private footholds in otherwise publicly provided sectors. This is an interesting argument that might be developed further by using power dependence to look at the relationship between governments and public sector providers. Continued enthusiasm for a sometimes small private sector presence in public service markets might say rather more about the bargaining power this gives governments over public sector stakeholders than it does faith in the private sector’s superior performance. Private providers can be used to broach important changes in practice at the same time as they represent a counterbalance to so-called producerist pressures whether in terms of pay or conditions. Governments may then have good reason to maintain a private market for public service delivery although whether it is in the economic interest of the private sector to continue to provide those services is another matter.

While by and large I found the paper clear and well organised, I would like to see the number of headings - and excessively brief sections reduced – with a view to the development of a clearer narrative. Furthermore there may be some benefit in reducing the review of conventional theory and developing the power-dependence argument a little more discursively. That said, I enjoyed reading this and support its publication.   

Author Response

Admsci-209366 Response to Reviewer #2

We appreciate your kind and thoughtful comments which helped us clarify our exposition.

As you suggested, we eliminated some of the sections of the paper so that the remaining sections are not excessively brief and we added to the exposition of Resource Dependence theory. 

On lines 55-60 you will see that the list of sections is shorter and you will find fewer heading throughout the paper.  The discussion of resource dependence is longer, with additions of lines 364-370 and 412-417.  While we didn’t add a lot, we believe we made our case both clearer and stronger and we appreciate your encouraging us to do so.

We sincerely appreciate the time and care you put into the consideration of our paper and hope that the changes we’ve made will meet with your approval.  We know that the paper and is better and easier to read because of your input. 

Round 2

Reviewer 1 Report

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Author Response

 We greatly appreciate your help with our paper.  We agree that predictions would add to our story, but we believe that we should develop and test a set of predictions and that this is another paper, building on what we accomplished in this one.