From‐Long Term To Short‐Term Contracting
| DOI | http://doi.org/10.1111/1467-9299.00244 |
| Date | 01 March 2001 |
| Published date | 01 March 2001 |
FROM LONG-TERM TO SHORT-TERM
CONTRACTING
JAN-ERIK LANE
One can look at the arrival of New Public Management and the extensive public
sector reforms inspired by this theory from many angles. Here we examine the shift
from long-term contracting, typical of bureaucracy and traditional enterprises, to
short-term contracting, borrowed from private sector governance methods. Short-
term contracting has three principal uses in the governance of the public sector: (a)
contracting with service providers after a tendering/bidding process; (b) contracting
with the CEOs of the incorporated public enterprises; and (c) contracting with
executive agencies about what they should deliver. Theoretical analysis, supported
by substantial empirical evidence, suggests that short-term contracting eliminates
the extensive post-contractual opportunism connected with long-term contracting,
but is vulnerable to pre-contractual opportunism. Short-term contracting is not just
another public sector reform fad, but constitutes a new tool for government which
increases efficiency when handled with prudence.
INTRODUCTION
The ongoing reforms of the public sectors in the OECD countries present
a true challenge for theoretical interpretation. New public management
presents a paradigm shift in the conduct of public sector activities. What
is involved in the public sector reform in the United Kingdom, in Scandina-
via and in Continental European countries as well as in Australia, New
Zealand and Canada is a general reconsideration of how government may
use and mix markets and bureaucracies in order to achieve its objectives
with regard to the provision of goods and services with a special emphasis
upon the employment of tendering and contracting out (Halligan and
Power 1992; Boston 1995; Coulson 1997; Choi 1999).
The 1990s public sector reforms have been vast and painstaking and they
may certainly be analysed from the standpoint of several social science
paradigms. Within public administration, it has been argued that the 1990s
have brought about a hollowing out of the state (Rhodes 1994; Campbell
and Wilson 1995; Peters 1997). However, reforms in the allocative and regu-
lative branches of government may be interpreted as the search for a new
model of public sector governance.
Although the characteristics of such a new regime are far from clear or
entirely known, they do involve that governments seek to substitute short-
Jan-Erik Lane is Professor and Director of the Department of Political Science at the University
of Geneva.
Public Administration Vol. 79 No. 1, 2001 (29–47)
Blackwell Publishers Ltd. 2001, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street,
Malden, MA 02148, USA.
30 JAN-ERIK LANE
term contracting for long-term contracting. Here we will employ a contrac-
tual perspective and view public sector reforms as responses to contractual
failures, which may be ameliorated by the design of new institutions for
how governments arrange for the provision of goods and services.
New public management, or NPM, is certainly not a coherent set of prin-
ciples that replace public administration. Several commentators have called
attention to the fact that new public management lacks a core set of ideas,
combines different reform strategies and gives the impression of fad and
fashion (Hood 1991, 1995). Not denying that the public sector reform strat-
egy of tendering/bidding cannot be traced back to a single body of theory,
I still wish to pose the following question: to what extent is it possible to
view the ongoing public sector reforms in capitalist democracies as a search
for optimal institutional design?
PUBLIC SECTOR REFORM, MECHANISM DESIGN AND
TRANSACTION COSTS
Posing a question about optimality involves the danger of committing the
sin of teleology, or naively believing that if one can identify optimal sol-
utions to social problems, then actors will automatically implement them.
The theory of the design of institutions is orientated towards finding the
rules of human interaction, which promote the achievement of optimal
social outcomes (Meyerson 1989; Ledyard 1989). But the institutions
designed must also be implementable, given the assumption that behaviour
is predominantly egoistic.
Mechanism design theory looks at the institutions that govern contractual
interaction (Molho 1997). It was basically developed for analysing contrac-
tual difficulties in the private sector, but we must ask whether it is not also
applicable to the public sector. As mechanism design theory asks which
institutions promote socially acceptable outcomes and, at the same time,
reduce the incentive to cheat or lie, we may apply it to public sector reform
issues, asking how governments would go about finding optimal contracts
for service provision and implement them.
In order to understand public sector reform conducted in accordance
with the NPM paradigm, we will focus upon the distinction between long-
term contracts and short-term contracts and state what it implies in terms
of a principal-agent approach to the public sector. Work upon the principal-
agent framework has been progressing since the 1970s, concerning prob-
lems in private sector interaction (Stiglitz 1989), but it is now often
employed in modelling public sector problems, for example bureaucratic
behaviour (Miller and Moe 1983). The distinction between long-term and
short-term contracts, however, has not been used earlier.
The principal–agent framework is highly applicable to human interaction
that takes places over a considerable time horizon, involving an agreement
between at least two persons according to which one (the agent) is
instructed to take action on behalf of another (the principal) against money
Blackwell Publishers Ltd. 2001
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