TY - JOUR AU - Banerjee, Abhijit AU - Hanna, Rema AU - Kyle, Jordan C AU - Olken, Benjamin A AU - Sumarto, Sudarno TI - Contracting out the Last-Mile of Service Delivery: Subsidized Food Distribution in Indonesia JF - National Bureau of Economic Research Working Paper Series VL - No. 21837 PY - 2015 Y2 - December 2015 DO - 10.3386/w21837 UR - http://www.nber.org/papers/w21837 L1 - http://www.nber.org/papers/w21837.pdf N1 - Author contact info: Abhijit Banerjee Department of Economics, E52-540 MIT 77 Massachusetts Avenue Cambridge, MA 02139 Tel: 617/253-8855 Fax: 617/253-1330 E-Mail: banerjee@mit.edu Rema Hanna Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617/496-1140 Fax: 617/496-5747 E-Mail: Rema_Hanna@hks.harvard.edu Jordan C. Kyle International Food Policy Research Institute 2033 K Street NW Washington, DC 20006 E-Mail: jordanckyle@gmail.com Benjamin A. Olken Department of Economics, E52-542 MIT 77 Massachusetts Avenue Cambridge, MA 02139 Tel: 617/588-1437 Fax: 617/868-2742 E-Mail: bolken@mit.edu Sudarno Sumarto TNP2K Jl. Kebon Sirih Jakarta Indonesia and SMERU E-Mail: ssumarto@smeru.or.id AB - Outsourcing government service provision to private firms can improve efficiency and reduce rents, but there are risks that non-contractible quality will decline and that reform could be blocked by vested interests exactly where potential gains are greatest. We examine these issues by conducting a randomized field experiment in 572 Indonesian localities in which a procurement process was introduced that allowed citizens to bid to take over the implementation of a subsidized rice distribution program. This led 17 percent of treated locations to switch distributors. Introducing the possibility of outsourcing led to a 4.6 percent reduction in the markup paid by households. Quality did not suffer and, if anything, households reported the quality of the rice improved. Bidding committees may have avoided quality problems by choosing bidders who had relevant experience as traders, even if they proposed slightly higher prices. Mandating higher levels of competition by encouraging additional bidders further reduced prices. We document offsetting effects of having high rents at baseline: when the initial price charged was high and when baseline satisfaction levels were low, entry was higher and committees were more likely to replace the status quo distributor; but, incumbents measured to be more dishonest on an experimental measure of cheating were also more likely to block the outsourcing process. We find no effect on price or quality of providing information about program functioning without the opportunity to privatize, implying that the observed effect was not solely due to increased transparency. On net, the results suggest that contracting out has the potential to improve performance, though the magnitude of the effects may be partially muted due to push back from powerful elites. ER -