The Relationship Between Population Size and Contracting Out Public Services: Evidence from a Quasi-experiment in Danish Municipalities

What is the causal relationship between population size and the contracting out of public service delivery in local governments? The size of the population of a given municipality has long been thought to be an important driver of contracting out public service delivery, which theoretically streamlines public service production and saves taxpayers’ money. This article makes use of the 2007 Danish local government structural reform—when 239 municipalities were merged into 66 new entities while 29 municipalities remained untouched—as a quasi-experiment to explore the population size/contracting out relationship. Results show that the relationship differs across policy sectors: It is negative for services with high fixed costs, presumably due to scale economies, and is positive for services that are difficult to measure, probably due to more administrative and technical capacity in larger municipalities. Also, the effect of population size is positive for tasks in free-choice markets, presumably because private contractors find large free-choice markets more attractive.