Vol. 19, No. 1

Andreas Knabe and Peter Birch Sørensen:
Outsourcing of Public Service Provision: When is it more efficient? (pp. 3–15)


Outsourcing to for-profit producers of social services will enable a local government to achieve a given service quality at lower budgetary cost. In the absence of appropriate cost sharing arrangements between the government and the service provider, outsourcing provides an incentive for producers to lower quality in order to reduce costs. The cost reductions per se tend to be efficiency-improving, but to prevent a deterioration of service quality policy makers must spend more resources on monitoring quality. Moreover, the greater effort exerted under private service provision will have to be compensated by higher factor rewards. Hence public in-house provision may be more cost-efficient than outsourcing. This is particularly likely to be the case when the quality of the service is difficult to measure so that marginal monitoring costs are high. The paper shows that these results emerge both when politicians are benevolent and when they distribute rents in exchange for political support. We also show that risk aversion and uncertainty about the potential for cost savings implies a bias against outsourcing. However, if contracts between policy makers and service providers allow appropriate cost sharing arrangements, we find that a version of the Coase Theorem holds: policy makers can then implement exactly the same optimal allocation under public as under private provision.

(JEL: H42, H57)

Morten I. Lau and Panu Poutvaara:
Social Security Incentives and Human Capital Investment (pp. 16–24)


While the effect of social security systems on retirement decisions has received much attention, there are no analytical results on the impact of these systems on individual incentives to invest in human capital. We integrate human capital investment and retirement decisions in an analytical life-cycle model with full certainty and investigate how different social security schemes may affect human capital investment and labor supply. We analyze and compare three different social security systems, differing on whether benefits are conditional on withdrawal from the labor market and on previous income.

(JEL: H55, I21, J26)

Michael Funke and Holger Strulik:
Taxation, Growth and Welfare: Dynamic Effects of Estonia’s 2000 Income Tax Act (pp. 25–38)


This paper analyses the long-run effects of Estonia’s 2000 Income Tax Act with a dynamic general equilibrium model. Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits. Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare. A sensitivity analysis shows that the results are rather robust.

(JEL: H25, H32, O41, O52)

Finnish Economic Papers 1/2006