442592

an and FernandezNonprofit and Voluntary Sector Quarterly

NVS42410.1177/0899764012442592Witesm

Article
Nonprofit and Voluntary Sector Quarterly

Government Contracts 42(4) 689­–715

© The Author(s) 2012
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DOI: 10.1177/0899764012442592
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Differences Between
Nonprofits and For-profits?

Eva M. Witesman1 and Sergio Fernandez2

Abstract
In this empirical study, we examine whether systematic differences exist between
government contracts with nonprofit and for-profit service providers. Based
on principal–agent theory, we examine the potential comparative advantage of
nonprofit organizations over for-profits in two areas: contracting process and
contract performance. We test hypotheses using data from a national survey of
local government contracts with private service providers. The results provide some
support for the propositions that public officials trust nonprofits more than for-
profits and grant them additional discretion. Even stronger support is found for the
propositions that nonprofits are monitored less than for-profits and are awarded
contracts of longer duration and for services characterized by higher levels of
task uncertainty than those awarded to their for-profit counterparts. We find no
significant differences in performance between nonprofit and for-profit contractors
in terms of cost, quality of work, responsiveness to government requirements, legal
compliance, or customer satisfaction.

Keywords
comparison of nonprofit and for-profit organizations, government contracting, perfor-
mance measurement, contract performance

1
Brigham Young University, Provo, UT, USA
2
Indiana University, Bloomington, IN, USA

Corresponding Author:
Eva M. Witesman, Assistant Professor of Public Management, Brigham Young University, Romney Institute
of Public Management, TNRB 771, Provo, Utah 84602, USA.
Email: eva_witesman@byu.edu
690 Nonprofit and Voluntary Sector Quarterly 42(4)

Introduction
Government contracts are an important part of the provision of public services in the
United States (Brudney, Fernandez, Ryu, & Wright, 2005; Cooper, 2003; Donahue,
1989; Kelman, 2002; Kettl, 2000; Martin, 1999; Savas, 2000; Warner & Hefetz, 2009).
Nonprofit organizations have played a prominent role in the delivery of services at the
state and local levels, especially since the Johnson administration’s Great Society ini-
tiatives of the 1960s (Bryce, 2005; Sanger, 2003; Salamon, 1995; Smith & Lipsky,
1993; Smith & Smyth, 1996). The interplay between public and nonprofit organiza-
tions underlies important policy issues involving the laws governing nonprofits, non-
profits’ financial dependence on government funding, and the effectiveness of
nonprofits in helping to implement public programs (Bryce, 2005; Powell, 1987; Salamon,
1995; Smith & Lipsky, 1993).
Principal–agent theory suggests that in a government contracting relationship, a for-
profit agent will be motivated to divert resources from the government principal in pursuit
of its own interests (Brown, Potoski, & Van Slyke, 2006; Bryce, 2005; Fernandez, 2009;
Van Slyke, 2007). Agency problems can be minimized, in part, by selecting agents whose
goals are closely aligned with those of the principal (Bryce, 2005; Van Slyke, 2007).
Nonprofit scholars have argued that public and nonprofit organizations have converging
interests and missions by virtue of their not-for-profit status and their legal responsibility
to serve the public interest or common good (Bryce, 2005; Hansman, 1987; Salamon,
1995; Sanger, 2003). This suggests nonprofit service providers will be perceived as better
partners by public officials and that their performance might be expected to be more sat-
isfactory to government than the performance of for-profit firms. Either of these percep-
tions would give nonprofit organizations a competitive advantage over for-profit firms in
government contracting (Brown et al., 2006; Bryce, 2005; Van Slyke, 2007).
From a principal–agent perspective, goal alignment between public and nonprofit
organizations should result in public managers trusting nonprofits more than for-profits
(Bryce, 2005; Mayer, Davis, & Schoorman, 1995). In this atmosphere of shared inter-
ests and mutual trust, public officials might expect to reduce transaction costs by engag-
ing in less rigorous screening and less frequent monitoring of nonprofit contractors.
Reduced opportunism, higher levels of trust, and lower transaction costs might be
expected to yield better results for public organizations selecting nonprofit organizations
(as compared with for-profits) to deliver public services.
In this study, we examine whether systematic differences exist between govern-
ment contracts with nonprofit and for-profit service providers. Based on principal–
agent theory, we develop and test a series of hypotheses about expected differences in
the way public officials perceive, structure, and manage contractual relationships with
nonprofit versus for-profit contractors. We also examine whether or not nonprofit
organizations outperform for-profits on five different performance measures. We test
these hypotheses using survey data on contractual relationships between American
local governments and private service providers. The study concludes with a discus-
sion of the findings and their implications for policy making and management.
Witesman and Fernandez 691

The Nonprofit Advantage From

a Principal-Agent Perspective
There are several advantages to applying principal–agent theory to the study of gov-
ernment contracting. First, though agency theory is now applied to a wide variety of
contexts, it is originally derived from contract law and its application to formal con-
tractual agreements—including government contracting—is straightforward. Second,
principal–agent theory provides clear, well-developed propositions regarding the
behavior of both principals and agents in structuring and managing contracts. Third,
principal–agency theory is widely used by scholars who study government contract-
ing (Brown et al., 2006; Bryce, 2005; Fernandez, 2009; Hefetz & Warner, 2004; Sclar,
2000; Van Slyke, 2007).
Economists, sociologists, and political scientists have written extensively about
agency relationships (Alchian & Demsetz, 1972; Jensen & Meckling, 1976; Kiser,
1999; McAfee & McMillan, 1986; McCubbins, Noll, & Weingast, 1989; Mitnick,
1980; Moe, 1984; Pratt & Zeckhauser, 1985; Sappington, 1991; Waterman & Meier,
1998; Wood & Waterman, 1991), which Jensen and Meckling define as “a contract
under which one or more persons (the principal[s]) engage another person (the agent)
to perform some service on their behalf that involves delegating some decision mak-
ing authority to the agent” (1976, p. 308). In such situations where separation of
ownership from production occurs, two agency problems typically arise: adverse
selection and moral hazard.
Adverse selection involves a situation in which the principal enters into a contrac-
tual relationship with an agent without knowing the true extent of the risk or cost
involved. Due to asymmetry of information favoring agents, a prospective agent is in
a position to withhold or misrepresent information about its experience, expertise, and/
or capabilities to improve its chances of being awarded the contract and minimize its
risk in a contractual relationship. In government contracting, the principal can lessen
the effects of adverse selection and enhance the value it reaps from the exchange by
conducting a thorough screening that induces prospective agents to reveal additional
information about their capabilities and history of performance (Fernandez, 2009;
LeRoux, 2007; Salamon, 1995).
Moral hazard refers to instances of opportunistic behavior on the part of the utility
maximizing agent. To the extent that the goals and interests of the contracting parties
diverge and the agent can conceal its behavior, the agent will be motivated to engage
in behavior that promotes its own interests at the expense of the principal’s, particu-
larly after the contract has been established. Incentive structures that discourage
opportunistic behavior along with efforts to monitor the agent serve to align the par-
ties’ interests and improve the value obtained by the principal (Brown & Potoski,
2003; Bryce, 2005; Sclar, 2000).
Agency problems stem in large part from the pursuit of divergent goals by the prin-
cipal and the agent. Agents can exhibit considerable variation in the interests and goals
they pursue (Waterman & Meier, 1998). Specifically, it has been proposed that the
692 Nonprofit and Voluntary Sector Quarterly 42(4)

organizational form—for-profit or nonprofit—can influence the degree to which the

interests and goals of a public organization diverge from those of the service providers
it hires (Bryce, 2005, 2006).
Two reasons have been offered for why the interests and goals of public organiza-
tions should align more with those of nonprofit organizations than with those of for-
profit firms. First, neither public nor nonprofit organizations are created to maximize
financial returns to their owners. Nonprofit organizations, while they can and often do
generate excess revenue, are prohibited from redistributing residual value among inves-
tors. Instead, profits must be reallocated for the purpose of achieving the organization’s
objective (Bryce, 2005; Ferris & Graddy, 1991; Smith & Smyth, 1996). For-profit firms
contracting with government, however, “will treat the performance standards set by
government as a constraint and will use any discretionary room that is left to them in
the contractual arrangements to maximize financial returns” and shift the residual value
to shareholders (Moore, 2002, pp. 317-318). For-profit firms are more likely to opt for
reducing costs at the expense of the government’s interests (Brown et al., 2006).
Second, public and nonprofit organizations share a mission to promote the public
interest (Hansman, 1987; Salamon, 1995; Sanger, 2003). While for-profit firms pursue
the narrow interests of shareholders by increasing profit and market share, nonprofits
are bound by the legal constraints of their incorporation status to pursue communal
interests and reinvest excess revenue. On dissolution, nonprofit assets

must, by state and federal laws, be transferred back to a similar nonprofit for the
benefit of the public or to the state which in turn distributes these assets for a
public purpose similar to that for which they were originally intended. (Bryce,
2005, p. 35)

This is not to say that the mission and goals of public organizations and nonprofit
contractors are perfectly aligned. Nonprofits may be “single-interest advocates,”
whereas public organizations are accountable to multiple constituencies (Cooper,
2003, p. 66). Also, many nonprofits have multiple programs and contracts, creating
opportunities for them to shirk on a particular contract by diverting funding and
resources toward other priorities (Brown et al., 2006). Furthermore, some nonprofits
are politically or ideologically charged and their precepts and values may be in direct
conflict with the desires of persons or parties in office.
Some theory suggests that nonprofits, as resource-seeking organizations, behave
opportunistically in a manner similar to their profit-seeking counterparts. Because
excess revenues can be reinvested in the nonprofit, the incentive to grow revenues and
cut costs remains (Steinberg, 1986). At the very least, research suggests that the resource-
rich environment of government contracting has motivated nonprofit firms to pay greater
attention to efficiency and cost concerns; at most, they may drift significantly from
focus on their original mission in favor of revenue from government contracts (Brown
& Potoski, 2005; Smith & Lipsky, 1993). Studies by Gazley and Brudney (2007) and
Gazley (2010) suggest that nuanced political and social dynamics exist that create
Witesman and Fernandez 693

disincentives for nonprofits to seek or engage in partnerships with governments, fur-

ther underscoring the potential for misalignment between government and nonprofit
goals, processes, and objectives.
We must acknowledge that there are other possible rationales for preference of
nonprofit firms over for-profit firms in local government contracting in addition to the
asserted advantage of goal alignment. Nonprofit organizations have been found to
garner significant social capital networks that government actors may seek to capture
to achieve both short-term political gains and longer term reductions in transaction
costs (Bryce, 2006; Feiock & Jang, 2009; Marwell, 2004). There may also be circum-
stances in which governments lack professional expertise that nonprofits have devel-
oped in particular subsectors such as social services (Brown & Potoski, 2005; O’Reagan
& Oster, 2000; Smith & Lipsky, 1993). Nonprofits may also simply be cheaper options
than for-profits, particularly when service outputs are difficult to monitor or measure
(Jang, 2005). Volatility in nonprofit funding may make them desperate for the revenue
streams offered by government contracts, such that nonprofits will alter their missions
to participate in a contract or to lower costs, a level of flexibility and eagerness that
governments may find to their advantage (Froelich, 1999; Smith & Lipsky, 1993).
Finally, many nonprofits are locally based, with board and staff members who have
established relationships with local government officials, an advantage that may not
be shared by some for-profit contractors.
Notwithstanding these considerations, a view of nonprofit organizations as trust-
worthy, public interest-driven agents that provide significant benefit to contracting
governments is prevalent in the nonprofit literature (Brown & Troutt, 2004; Valentinev,
2008).
The supposition of goal alignment between government and nonprofit entities sug-
gests three possible mechanisms for government preference for contracting with non-
profits: nonprofits could behave in a less opportunistic manner, yielding higher levels
of contract performance; nonprofits could behave similar to for-profits but govern-
ment principals expect or perceive them to behave in less opportunistic ways; or gov-
ernments may expect benefits from contracting with nonprofits that are unrelated to
goal alignment. In any of these cases, theory suggests that we would expect to see
systematic differences in the way public officials perceive, structure, and manage their
relationships with nonprofits contractors compared to for-profit ones (Bryce, 2006).
Only in the first of these three cases, however, would we expect to see a sector-based
difference in performance.

Research on Nonprofit Comparative

Advantage in Contracting
Explicitly contractual arrangements are only a subset of government nonprofit part-
nerships (Cho & Gillespie, 2006; Fosler, 2002; Gazley, 2008, 2010; Gazley & Brudney,
2007; Marwell & McInerney, 2005). Even less formal collaborations between govern-
ment and nonprofit agencies tend to be led by government and tend to lack shared
694 Nonprofit and Voluntary Sector Quarterly 42(4)

authority or resources (Gazley, 2008), even though several approaches to public–

nonprofit collaboration exist (Coston, 1998).
A growing body of literature examines contractual relationships between govern-
ment and private entities, resulting in part from the increase of privatization and con-
tracting starting in the 1980s (e.g., Becker, 2001; Becker & Patterson, 2005; Brown &
Potoski, 2003; Brown et al., 2006; Ferris & Graddy, 1986; Milward & Provan, 2000;
Savas, 1987; Seidenstat, 1999; Van Slyke, 2007). A subset of this literature focuses on
the practice of contracting with nonprofit firms, focusing primarily on describing the
nature of government-nonprofit contracts (Bennett & Iossa, 2009; Brown et al., 2006;
Coston, 1998; Smith & Lipsky, 1993; Van Slyke, 2007).
A separate body of research examines sector-based differences in performance
when for-profits and nonprofits are engaged in the same activities. Such research has
focused primarily on areas in which both organizational forms are prevalent (Netting,
McMurtry, Kettner, & Jones-McClintic, 1990), including hospitals, job training, child
care and nursing homes (Domberger, & Hensher, 1993; Heinrich, 2003; Knox,
Blankmeyer, & Stutzman, 2006; Leviten-Reid, 2010; Luksetich, Edwards, & Carroll,
2000; Moynihan et al., 2011; Rosenau & Linder, 2003). These studies have generally
been consistent in demonstrating little or no sector-based difference in performance,
though one study found that private, secular nonprofits outperformed other organiza-
tional forms in cost (Knox et al., 2006). At least one study examines consumers’ pref-
erence for nonprofits, finding that they are more likely to trust and patronize nonprofits
even when they are not necessarily aware of the incorporation status of the organiza-
tions (Handy et al., 2010).
Research on the intersection of organizational form and contracting reveals addi-
tional support for the expectation of a nonprofit advantage. Lamothe and Lamothe
(2006) find that for-profits were preferred by governments over nonprofits as contract-
ing partners, but that even after accounting for service area, nonprofits were less likely
to suffer contract failure. Other research suggests that, due to expertise and mission
focus, nonprofits are preferable to for-profits when outputs and outcomes are difficult
to measure (Brown & Potoski, 2005; Ferris & Graddy, 1986; Jang, 2005), when the
good to be contracted is a common-pool resource (Feiock, Clinger, Shrestha, & Dasse,
2007), or when the government intends to shift control rights to the contractor (Bennett
& Iossa, 2009).

Hypotheses
This article contributes to the nonprofit contracting literature by examining sector-
based differences and the potential comparative advantage of nonprofit organizations
in two areas: contracting process and contract performance. Based on principal–agent
theory and previous research, we expect that local government agents will perceive,
structure, and manage contractual relationships with nonprofits differently from rela-
tionships with for-profits; namely, we expect that nonprofits will be trusted more, be
subjected to less rigorous screening, be monitored less, be granted more discretion,
Witesman and Fernandez 695

receive contracts of longer duration, and be awarded contracts for services characterized
by higher task uncertainty. Principal–agent theory also suggests that nonprofits may
be expected to outperform for-profit contractors due to alignment with government
goals. Thus we also examine contractor performance on five dimensions: cost, quality
of work, responsiveness to government requirements, legal compliance, and customer
satisfaction.

Contract Process
Experts have commented on the benefits of interorganizational trust for contractual
and other forms of interorganizational relationships (Macneil, 1980; Sclar, 2000;
Williamson, 1985; Zaheer & Venkatraman, 1995). Interorganizational trust is often
defined as a multidimensional construct involving the three components of depend-
ability, predictability, and faith in a relationship between two or more parties (see
Zaheer, McEvily, & Perrone, 1998). As Young-Ybarra and Wiersema explain,

dependability refers to expectations that the partner will act in the alliance’s best
interest, predictability refers to consistency of actions by the partner, while faith
refers to the belief that the partner will not act opportunistically, even in unfore-
seen or novel situations. (1999, p. 443)

Whereas a for-profit firm’s primary objective is to maximize profits, public and non-
profit organizations share a common interest in improving public welfare. This com-
mon interest should increase the likelihood that they will forgo short-term advantages
in favor of mutual, long-term gains. From a principal–agent perspective, therefore, we
would expect public organizations to trust nonprofit organizations more than for-
profit firms, even before they enter into a contractual agreement.

Hypothesis 1: Nonprofit contractors will be trusted more than for-profit

contractors.

Principal–agent theory underscores the need for principals to rigorously screen agents
to reduce the risk of adverse selection. In government contracting, screening involves
performing a comprehensive ex ante evaluation of the contractor’s capacity to meet and
exceed performance expectations using a variety of criteria, including the contractor’s
financial viability, technical capacity, staffing capacity, and previous experience and per-
formance (LeRoux, 2007; Rehfuss, 1989; Romzek & Johnston, 2002). Public officials
incur transaction costs to undertake these activities. If the interests and goals of contract-
ing parties converge, however, a contractor would be expected to have less incentive to
withhold or distort information about its capabilities and past performance, allowing
public officials to significantly reduce if not completely forgo screening costs.

Hypothesis 2: Nonprofit contractors will be subjected to less rigorous screening

than for-profit contractors.
696 Nonprofit and Voluntary Sector Quarterly 42(4)

Much of the literature on contracting for services places a premium on rigorous

contract monitoring (Brown & Potoski, 2003; Hefetz & Warner, 2004; Lavery, 1999;
LeRoux, 2007; Rehfuss, 1989; Savas, 2000; Seidenstat, 1999). Contract monitoring
involves monitoring different aspects of performance (e.g., inputs, processes, outputs,
cost, timeliness, legal compliance), using a variety of monitoring tools and procedures,
including inspections of work, complaints monitoring, performance goals and mea-
sures, and customer surveys. Rigorous monitoring curbs opportunistic behavior by
increasing the chances such behavior will be detected. Greater goal alignment
between public and nonprofit organizations should reduce the expectation of oppor-
tunistic behavior since such behavior would be at odds with the nonprofit’s own
interests. With the risk of moral hazard reduced, we would expect public officials to
monitor nonprofit contractors less frequently (Aulakh, Kotabe, & Sahay, 1996;
DeHoog, 1990; Fernandez, 2009; Jeffries & Reed, 2000).

Hypothesis 3: Nonprofit contractors will be monitored less frequently than for-

profit contractors.

Principals use a combination of incentives and monitoring techniques to reduce

the risk of moral hazard stemming from discretionary behavior on the part of the
agent, incurring transaction costs in the process. To the extent that the interests and
goals of the principal and agent converge, we would expect to see the agent exercise
discretion in ways that benefit both parties to the agreement. Conversely, divergent
goals and interests increase the risk of moral hazard. To illustrate, a nonprofit con-
tractor delivering social services might exercise discretion in how it deploys its
resources in ways that allow it to reach the greatest number of clients in need, while
a for-profit contractor my engage in “creaming” by serving only those clients who
are easy to reach and less expensive to treat (Kamerman & Kahn, 1989). We would
expect these two situations to elicit different responses from public officials, afford-
ing discretion to the contractor in the former situation and taking steps to curb dis-
cretion in the latter.

Hypothesis 4: Nonprofit contractors will be granted greater discretion than for-

profit contractors.

A formal bidding process can be lengthy and cause the principal to incur the costs
of preparing solicitation documents, writing technical specifications, evaluating ven-
dors, negotiating proposals, and drafting contract documents. Awarding contracts of
longer duration allows the principal to economize on time, postpone costs incurred
when transitioning between service providers, and provide greater opportunities for
the parties to develop trust (Fernandez, 2009; Sclar, 2000). We expect public officials
to award contracts of longer duration to agents whose goals align with those of govern-
ment and who are less likely to engage in opportunist behavior.
Witesman and Fernandez 697

Hypothesis 5: Nonprofit contractors will be awarded contracts of longer dura-

tion than for-profit contractors.

Higher levels of task uncertainty are common in the public sector, where “[g]reater
vagueness, intangibility or difficulty in measuring . . . performance criteria” can create
ambiguity in performance expectations (Rainey, 2003, p. 75). High task uncertainty in
contractual relationships makes it difficult for the principal to specify contract require-
ments and performance standards. This increases the risk of adverse selection as well
as of moral hazard. Task uncertainty undermines the principal’s ability to be a “smart
buyer” capable of assessing the level of competence of prospective agents (Kettl,
1993). In addition, it increases the possibility of an agent diverting resources from the
contract or engaging in opportunistic behavior without being detected. These risks are
reduced, however, when there is goal alignment between the parties since alignment
acts as a deterrent against opportunism.

Hypothesis 6: Nonprofit contractors will be awarded contracts for services char-

acterized by higher levels of task uncertainty than for-profit contractors.

Contract Performance
From a principal–agent perspective, greater goal alignment between public and non-
profit organizations should mean that nonprofits exert considerable effort and demon-
strate high reliability in performing the work of government, resulting in a higher
level of effectiveness. Interestingly, previous studies suggest modest or no difference
in performance based on organizational form (Heinrich, 2003; Knox et al., 2006;
Leviten-Reid, 2010; Luksetich et al., 2000; Rosenau & Linder, 2003). Nonetheless,
principal–agent theory suggests that goal alignment should result in higher levels of
nonprofit performance (Bryce, 2005).
As pointed out by Fernandez (2009),

the privatization literature suggests the possibility of trade-offs between differ-

ent dimensions of contracting performance. For example, to maximize effi-
ciency, contractors may cream cases or reduce service levels. Similarly, efforts
to streamline service delivery to improve timeliness could negatively impact
service quality. (p. 77)

It is therefore important to use a variety of performance measures when comparing

nonprofit and for-profit contractor performance.
One of the primary justifications made by governments for contracting out is cost
savings. Siegel’s (1999) review of the literature found that contracting improved effi-
ciency and effectiveness and led to cost savings in a number of service areas. The
results of some surveys of local officials also have indicated that privatization reduces
698 Nonprofit and Voluntary Sector Quarterly 42(4)

the cost of public services (Chi & Jasper, 1998; Dilger, Moffett, & Struyk, 1997). At
least one study (Knox et al., 2006) empirically finds that nonprofit organizations out-
perform other types of contractors in terms of cost. Based on principal–agent theory
and the expectation of government-nonprofit goal alignment, we expect that, all other
things being equal, government contracts with nonprofits will cost less than contracts
with for-profit providers.

Hypothesis 7: Nonprofit contractors will perform better than for-profit contrac-

tors in terms of contract cost.

Bendick (1989) noted that in contracting for social welfare services, cost reduc-
tions may come at the expense of lower quality of service. Kamerman and Kahn’s
(1989) analysis of privatized child care programs in North Carolina found that gains
in efficiency were attained through a reduction in the level of service provided. Any
evaluation of contracting performance should include a measure of service quality.
Given the assumption that nonprofit organizations provide services to fill a need
rather than to gain profit, we hypothesize that nonprofits will outperform for-profits
on this dimension.

Hypothesis 8: Nonprofit contractors will perform better than for-profit contrac-

tors in terms of quality of service.

Nonprofit theory suggests that nonprofit organizations are allies of government in

achieving particular social aims, thus providing justification for the nonprofit tax
exemption. The presumption of goal alignment suggests that nonprofits will be par-
ticularly sensitive and responsive to the needs of government in achieving their shared
goal, particularly as mutuality increases (Brinkerhoff, 2002). Young (2006) suggests
that governments and their nonprofit partners have linked accountability systems (sup-
plementary, complementary, or mutually accountable). On the contrary, for-profit enti-
ties are primarily interested in maximizing profits and may see the needs of government
as unnecessary constraints or bureaucratic red tape that drain resources.

Hypothesis 9: Nonprofit contractors will perform better than for-profit contrac-

tors in terms of responsiveness to government requirements.

A similar argument suggests that for-profits will see legal requirements as unneces-
sarily binding and preventative of profit generation, whereas nonprofits would be more
likely to view laws and regulations as tools for achieving the public interest for which
they, too, are responsible. Van Slyke’s (2007) analysis suggests that the behavior of
nonprofit organizations as stewards with goal alignment in contracting relationships—
rather than as traditional, self-interested agents—may help to guard the public trust and
improve accountability including but not limited to legal compliance. Hall and Kennedy
(2008) suggest that legal compliance is a key indicator of strong nonprofit
Witesman and Fernandez 699

organizations and can be used to predict successful program outcomes in a contracting

situation.

Hypothesis 10: Nonprofit contractors will perform better than for-profit contrac-
tors in terms of compliance with the law.

Lastly, we expect that the commitment of nonprofit organizations to the public may
lead to a greater commitment to pleasing the end users of public services, whereas for-
profit firms in a contracting situation might be expected to reduce customer service
levels since the primary source of revenue is from the government, not the consumer.
Handy et al. (2010) found that consumers are more likely to trust and patronize non-
profit organizations, suggesting greater satisfaction with nonprofits than with other
organizational forms.

Hypothesis 11: Nonprofit contractors will perform better than for-profit contrac-
tors in terms of customer satisfaction.

Data and Method

Most of the data for the analysis were gathered through a survey of American local
governments conducted in 2003-2004. The survey asked respondents to answer a
wide range of questions about a specific, randomly selected contractual relationship
with a private service provider. Since most of the concepts that are important for
understanding systematic differences between nonprofit and for-profit contractors are
at the level of the dyadic relationship between principal and agent, the unit of analysis
in this study is the contractual relationship between a local government and a private
service provider and not the local government itself.
Generating a representative sample of contractual relationships with private pro-
viders at the local level can be a daunting task, since no sampling frame of all local
government contracts exists from which to draw such a sample. At the time we con-
ducted our survey, the International City/County Management Association’s (ICMA)
2002-2003 Alternative Service Delivery Survey appeared to be the most representa-
tive source of information on local government contracting and other forms of service
delivery. A total of 982 local governments responded to the ICMA survey as having
used contracting with either for-profit or nonprofit providers. For each of the 982 local
governments, we randomly selected one service that had been contracted out to either
a for-profit or nonprofit provider. We then sent out a mail survey to the professional
manager or chief executive of each of these 982 local governments, asking him or her
to limit survey answers to a single contract for the randomly selected service, and to
identify this contract by name. By limiting the choice to a single randomly selected
service that had been contracted out to a private provider, we were able to produce a
more representative sample of local government contracts with private organizations.
In case the jurisdiction had more than one contract of the same type, respondents were
700 Nonprofit and Voluntary Sector Quarterly 42(4)

instructed to “provide answers in reference to the first provider in alphabetical order

by name of the firm” to maintain randomness. This helped to ensure that the unit of
analysis was indeed a principal–agent dyad and served to reduce respondent bias.
The response rate for our survey of local government contracts was 48% (n = 439),
which compares favorably to other recent large-n privatization studies (Brown &
Potoski, 2003; Brudney et al., 2005). Responding and nonresponding local govern-
ments were similar in terms of type of jurisdiction, population, geographic region, met-
ropolitan status, and form of government, offering no indication of nonresponse error
(Groves, 1989; Keeter, Miller, Kohut, Groves, & Presser, 2000). The distribution of
contracts in our completed survey also closely resembles that of services reported in
ICMA’s 2002-2003 Alternative Service Delivery Survey as having been contracted out
to either for-profit or nonprofit providers. This suggests our sample is representative
of the services and functions that local governments hire private for-profit and non-
profit contractors to deliver to residents.1
Most variables were measured using ordinal (e.g., Likert-type) survey items. Some
variables—including trust, monitoring, discretion, and task uncertainty—are mea-
sured using summated rating scales based on the raw ordinal data. An effort was made
to use scales based on survey items used by other scholars studying contracting for
services and other forms of interorganizational relationships. The survey items used to
create a scale for trust are based on those developed by Young-Ybarra and Wiersema
(1999). The items used to measure monitoring closely resemble those developed by
ICMA in their Alternative Service Delivery Surveys and used by scholars studying
government contracting (e.g., see Brown & Potoski, 2003; Fernandez, Ryu, & Brudney,
2008). All summated rating scales were standardized to make interpretation more
straightforward.2
Measures for individual dimensions of contractor performance are based on
responses to the following five ordinal survey items: “How would you rate the con-
tractor’s performance in the following areas: actual cost in comparison to projected
cost; quality of work; responsiveness to the government’s requirements; customer sat-
isfaction; compliance with the law.” (Response categories: 1 = poor through 4 =
excellent).
In addition to the data gathered through our own mail survey, we used data from the
ICMA 2002-2003 Alternative Service Delivery Survey to measure three variables
used in the analysis: population size, total revenues, and form of government.
Differences between local government contractual relationships with nonprofits
and for-profits were analyzed using a variety of statistical methods. To test for differ-
ences on interval variables, we used a one-tailed difference of means t test and analysis
of covariance (ANCOVA), a multivariate technique used to estimate a difference of
means while controlling for covariates that may act as confounding variables. A
Levene’s test was performed to test the hypothesis of equal variance. In cases where a
variable failed the test, a t test that assumes unequal variance was used instead of a
conventional t test. We report the more appropriate test in each circumstance. The per-
formance of contractors was measured using ordinal survey items, making a difference
Witesman and Fernandez 701

of means t test or ANCOVA inappropriate. We therefore tested for differences in per-

formance between public and nonprofit contractors using a difference of medians test
and multivariate ordered probit model (OPM) regression to control for variables other
than sector that may be correlated with performance.3
In our multivariate analyses, including analysis of covariance and ordered probit
regression, we include a range of control variables at the contractual and local gov-
ernment levels of analysis. These include trust, screening, monitoring, discretion
given to contractor, contract length, task uncertainty, contract size in dollars, whether
or not the contractor had delivered the service in the past, overall contractor perfor-
mance, local government population, local government total revenues, professional
manager form of government, and six dummy variables for service/function type.
The analysis of covariance tests for the variables trust, monitoring, and discretion
also include a summated rating scale measuring overall contracting performance as
an additional covariate.

Findings
The results of the empirical analysis are presented in two parts, the first covering the
hypotheses related to the contracting process and the second covering hypotheses
about contract performance.

Contract Process
Based on principal–agent theory, we posited that for-profit firms seek primarily to
maximize profits for their owners while public and nonprofit organizations share the
goal of improving public welfare. As a result, we expect public officials to trust non-
profit contractors more than for-profit ones (Hypothesis 1). The difference of means t
test shows that the mean value for trust is greater for nonprofit contractors than for
for-profit ones (p < .05, see Table 1). Since trust is measured in the form of a sum-
mated rating scale that has been standardized, the results indicate slightly more than
a quarter standard deviation increase in trust for nonprofit contractors compared to
for-profit ones. The results of the analysis of covariance, on the other hand, fail to
show a statistically significant difference in the amount of trust in nonprofits and for-
profits when all the covariates are included as controls. We thus find only partial sup-
port for Hypothesis 1.
Based on the assumption of goal alignment between public and nonprofit organiza-
tions, we predicted that the risk of adverse selection would be reduced when contract-
ing with nonprofit providers instead of for-profit ones. We expect nonprofit contractors,
therefore, to be subjected to less rigorous screening before contract award than for-
profit contractors (Hypothesis 2). The results show no meaningful difference in the
quantity of information public managers take into account when evaluating the perfor-
mance capacity of nonprofit and for-profit contractors. Both the difference of means t
test and the analysis of covariance show no statistically significant difference in the
702 Nonprofit and Voluntary Sector Quarterly 42(4)

Table 1. Nonprofits Versus For-Profits, Contracting Process.

Difference of Means t test Analysis of covariance

Variable Mean t-value Mean F-value  

Trust
 Nonprofits 0.24 2.03* 0.06 0.83
 For-profits −0.04 −0.01  
Screening
 Nonprofits 5.38 −0.28 5.06 0.03
 For-profits 5.46 5.01  
Monitoring
 Nonprofits −0.46 4.07** −0.32 5.23*
 For-profits 0.08 0.10  
Discretion
 Nonprofits 0.24 1.96* −0.10 0.36
 For-profits −0.04 0.01  
Contract length
 Nonprofits 6.20 3.07** 6.03 11.85**
 For-profits 3.89 3.53  
Task Uncertainty
 Nonprofits 0.29 2.56** 0.22 4.68**
 For-profits −0.05 −0.08  
Note: Analysis of covariance tests include the following covariates: trust, screening, monitoring, discretion
given to contractor, contract length, task uncertainty, contract size in dollars, whether or not the contrac-
tor had delivered the service in the past, overall contractor performance (only for trust, monitoring, and
discretion models), local government population, local government total revenues, a professional manager
form of government, and six dummy variables for service/function type.
*p < .05. **p < .01.

mean number of factors considered when screening contractors. Perceived goal align-
ment and greater trust in nonprofits does not appear, therefore, to reduce transaction
costs in the preaward screening stage of the contracting process. These results contra-
dict Hypothesis 2.
We also hypothesized that nonprofit contractors will be monitored less frequently
(Hypothesis 3). The difference of means t test shows that the mean for monitoring is
lower for nonprofit contractors than for-profits (p < .01). Similarly, analysis of covari-
ance results indicate less frequent monitoring of nonprofits (p < .01). Monitoring is
measured in the form of a summated rating scale that has been standardized. In terms
of substantive significance, therefore, both tests show that the mean score on monitor-
ing frequency for nonprofit contractors is about half a standard deviation lower than
for for-profit contractors. The magnitude of this difference is modest but substantively
significant. These results offer strong support for Hypothesis 3.
Witesman and Fernandez 703

We analyzed the correlation between our measures of trust and contract monitoring
to see whether these variables are linked. The results (not shown) show a weak nega-
tive correlation between trust and contract monitoring (r = –.11, p < .05). This suggests
that trust in nonprofit contractors acts to some degree as a substitute for monitoring,
allowing public organizations to reduce transaction costs during the operations phase
of contracting. We also find that trust is positively correlated with a variable measuring
the extent to which public organizations and nonprofit contractors cooperate to iden-
tify and solve problems (r = .27, p < .01; results not shown).4 Higher levels of trust
between public and nonprofit organizations may promote cooperation and mutual
adaptation, resulting in less perceived need for monitoring activities.
If nonprofit providers are trusted more than for-profit providers due to goal alignment
between public and nonprofit organizations, public officials should grant them greater
discretion (Hypothesis 4). The results of the empirical analysis offer some support for
this hypothesis. The difference of means t test shows the mean value for the amount of
discretion granted is greater for nonprofit contractors than for-profit contractors (p < .05).
Since our measure of discretion is a summated rating scale that has been standardized, the
amount of discretion granted to nonprofit contractors is about a quarter of a standard
deviation above that given to for-profit contractors. The analysis of covariance results,
on the other hand, indicate no difference in the amount of discretion given to nonprofits
and for-profits when we control for a host of covariates.5
We hypothesized that nonprofit contractors would be awarded longer contracts
(Hypothesis 5). Awarding contracts for longer periods of time allows principals to
postpone transaction costs associated with preparing a new solicitation or making the
transition from external to internal service delivery in the event the decision is
made to contract back in (see Hefetz & Warner, 2004; Lamothea & Lamothea, 2006).
The results of both the difference of means t test and analysis of covariance show that
the mean length of contracts awarded to nonprofits is about 6 years compared to less
than 4 years for for-profits (p < .01), a meaningful difference in contract length. This
provides strong support for Hypothesis 5.
We hypothesized that public officials would award contracts to nonprofits for ser-
vices characterized by higher levels of task uncertainty than the services contracted out
to for-profits (Hypothesis 6). The results of both the differences of means t test and
analysis of covariance indicate the mean value for task uncertainty is greater for non-
profit contractors than for-profit ones (p < .01). Since task uncertainty is measured in the
form of a summated rating scale that has been standardized, the difference appears to be
about a third of a standard deviation increase in task uncertainty in services contracted
out to nonprofits compared to those contracted out to for-profits. This is a modest but
substantively significant difference in support of Hypothesis 6.
In light of only partial support for the proposition that nonprofit contractors are
trusted more, there must be other factors that explain why local governments expose
themselves to additional risks when they monitor nonprofits less frequently and award
nonprofits contracts of longer duration for services involving greater task uncertainty.
Several of these factors were mentioned previously, including greater familiarity with
704 Nonprofit and Voluntary Sector Quarterly 42(4)

Table 2. Nonprofits Versus For-Profits, Contractor Performance.

Difference of medians test

Variable Median z score  

Cost
 Nonprofits 3.00 1.55
 For-profits 3.00  
Quality of work
 Nonprofits 3.00 0.94
 For-profits 3.00  
Responsiveness to government requirements
 Nonprofits 3.00 −0.41
 For-profits 3.00  
Compliance with the law
 Nonprofits 3.00 1.32
 For-profits 3.00  
Customer satisfaction
 Nonprofits 4.00 2.36*
 For-profits 3.00  
*p < .05. **p < .01.

nonprofit firms, which tend to be locally based and more embedded in local networks.
Our data provide indirect evidence that such familiarity may help explain these differ-
ences in how local officials structure and manage their contracts with nonprofit and
for-profit contractors. The percentage of contractors in our sample who had previously
worked for the local government was significantly greater for nonprofits (77% vs.
65%; p < .01), suggesting a longer history of interaction between public officials and
nonprofit contractors. In addition, the percentage of contractors who were awarded
sole source contracts was considerably higher for nonprofits (62% vs. 10%; p < .01).
The practice of awarding sole source contracts that are negotiated and renewed at fre-
quent intervals without a formal bidding process enables local governments to reduce
transaction costs over time.

Contract Performance
Table 2 shows the results of the difference of medians tests used to compare nonprofit
and for-profit contractors on five different measures of contractor performance: cost
(Hypothesis 7), quality of service (Hypothesis 8), responsiveness to government
requirements (Hypothesis 9), compliance with the law (Hypothesis 10), and customer
satisfaction (Hypothesis 11). The difference of medians tests show that nonprofit con-
tractors perform better than for-profit ones only when it comes to customer satisfaction.
Witesman and Fernandez 705

The median score on customer satisfaction for nonprofits is 4.00 compared to 3.00 for
for-profits (p < .05). This represents the difference between a rating of “very good”
and “excellent.” For the other four measures of contractor performance, however, we
found no statistically significant difference between the two groups of contractors.
To perform a more rigorous test of the performance hypotheses, we used ordered
probit model (OPM) regression to estimate each of the five performance measures
(see Table 3). The models include controls for variables on which nonprofit and for-
profits have been compared: trust, screening, monitoring, discretion, contract length,
and task uncertainty. They also control for the effects of contract size in dollar terms,
if the contractor had delivered the service in the past, service type (six dummy vari-
ables), local government population, and a professional manager form of govern-
ment. A dummy variable for nonprofit contractor (1 = nonprofit) is the primary
independent variable. The OPM results show that the nonprofit contractor variable
fails to achieve statistical significance at the p < .10 level in all five ordered probit
models. In these models, trust and discretion are generally found to be positively and
negatively correlated, respectively, with different measures of contractor perfor-
mance. In the case of cost and responsiveness, having a professional manager form of
government is positively correlated with performance. These multivariate OPM
results generally mirror those from the bivariate difference of medians tests, offering
virtually no evidence in support of Hypotheses 7 through 11. These results are in line
with previous findings indicating no relationship between organizational form and
performance (Heinrich, 2003; Knox et al., 2006; Leviten-Reid, 2010; Luksetich et al.,
2000; Rosenau & Linder, 2003).

Limitations of the Study

Several limitations to this study are worth mentioning. One limitation of the current
study is that the data do not allow us to determine whether the modest benefits public
officials can obtain from contracting with nonprofits help nonprofits outcompete for-
profits in a formal bidding process. The focus of the study is on differences between
nonprofit and for-profit contracts that would point to a latent competitive advantage,
not necessarily a realized one. In others, we have searched for differences in the way
public officials structure and manage their contractual relationships with nonprofit
versus for-profit contractors, and in the contract performance of these two kinds of
contractors, that would suggest nonprofits have a potential advantage over for-profits
when it comes time to bidding on government contracts. We do not actually analyze
the probability of a nonprofit winning a contract over a for-profit.
The examination of only contracts with private service providers limits the external
validity of our article inasmuch as it applies to the broader universe of service delivery
options. More study is needed to determine conditions under which public managers
actively select nonprofit contractors over for-profits (as well as over other forms of
service delivery, such as franchises, volunteers, in-house service, and intergovernmen-
tal contracting). This study is also limited only to a local government context; we make
706 Nonprofit and Voluntary Sector Quarterly 42(4)

Table 3. Ordered Probit Model Regression, Contractor Performance, Nonprofits Versus For-
Profits (n = 439).

Dependent variables

Customer Legal
Independent variables Cost Quality Responsiveness satisfaction compliance
Nonprofit contractor 0.20 −0.07 −0.39 −0.51 −0.10
Trust 0.67*** 1.56*** 1.33*** 1.41** 1.09***
Screening 0.08 0.09 0.14** 0.13* 0.13**
Monitoring 0.02 0.01 0.01 0.02 0.01
Discretion −0.28** −0.23* −0.18 −0.16 −0.20*
Contract length 0.01 0.01 0.10** 0.01 −0.02
Contract size (in dollars) −0.01 –0.01 0.01 −0.01 −0.01**
Previous contractor −0.01 −0.39* 0.28 −0.08 −0.06**
Public works/ −0.05 0.22 −0.18 0.03 0.13
transportation
Public utilities −0.38 1.28 2.28** 0.29 0.01
Public safety −0.31 0.07 0.02 −0.42 −0.43
Health and human services −0.68 −0.19 −0.47 −0.58 −0.06
Parks and recreation –0.60 −0.25 −0.28 0.36 −0.23
Cultural and arts programs –1.79* 1.04 −0.70 2.58** −0.43
Local government −0.01 −0.01 0.01 0.01 −0.01
population
Professional manager form 0.43* 0.07 0.43* 0.32 0.25
of government
Cox and Snell Pseudo R2 0.12 0.35 0.31 0.32 0.22
McFadden Pseudo R2 0.07 0.21 0.18 0.20 0.14
*p < .10. **p < .05. ***p < .01.

no claims about government contracting with private providers at other levels of

government.
Another limitation of the study is the sample size. Our sample is large enough to
draw inferences about general differences in the way public officials perceive, struc-
ture, and manage their contractual relationships with nonprofit and for-profit contrac-
tors. The sample is not large enough, however, to probe within service areas to examine
differences when nonprofits and for-profits deliver specific services such as substan-
tive abuse services, operations of homeless shelters, and operations of museums—
where a nonprofit competitive advantage may be more pronounced—or services like
fleet management, residential solid waste collection, and street repair where for-profits
are more likely to have the edge, particularly in terms of capacity and efficiency.
Generalizability is also limited by the fact that the data were gathered from only one
Witesman and Fernandez 707

level of government. Nonprofit providers at the local level may be more likely to be
locally based and have stronger ties to elected officials and public managers than for-
profits. It is unclear whether the same holds true at the state or federal levels. The
findings are also limited to government contracting with nonprofits and for-profits and
not other governmental entities, an important and growing form of alternative service
delivery among American local governments (see Brown, 2008; Marvel & Marvel,
2008; Warner & Hefetz, 2009).
The use of self-reported data from a single survey raises the specter of common
method bias. Common method bias is generally believed to produce artificially inflated
correlations (Crampton & Wagner, 1994) although in some cases the bias can also
deflate correlations (Cote & Buckley, 1988; Podsakoff, MacKenzie, & Podsakoff,
2003). There is no definitive test for common method bias, and scholars recommend
tackling the issue ex-ante during survey instrument design. One frequently suggested
ex-post test is the Harman single factor test, which involves subjecting all the items in
a survey to an unrotated principal component factor analysis. A Harman test of our
survey data produces a multiple-factor solution, with 15 factors having Eigenvalues
above 1.5. Thus the results of the Harman test, while not refuting the presence of com-
mon method bias, fail to produce convincing evidence of its presence.
A related methodological issue of concern is social desirability bias. As many of the
survey items refer to the behavior and actions of public officials responding to the
survey, they may be inclined to respond to questions in ways that cast themselves in a
positive light. Indeed, some of the variables used in the analysis, including the moni-
toring and performance variables, appear to be positively skewed. This may affect the
statistical conclusion validity of the results reported here.
Analysis of comparative performance between for-profits and nonprofits may also
be hindered by issues of measurement. Despite the prevalence of attempts at perfor-
mance measurement in public and nonprofit programs, the performance measurement
movement has not yielded particularly concrete gains, particularly where desired out-
comes are not particularly quantitative (Alexander, Brudney, & Yang, 2010; Ingraham,
2007). Some researchers suggest “soft” alternatives to traditional performance measure-
ment in nonprofit contracting, including the use of trust as an indicator of performance
(Greiling, 2007).
Despite these limitations, we believe that this study puts previous work comparing
nonprofits with for-profits into greater relief by demonstrating systematic differences
between contracts with for-profits and nonprofits across the entire range of service
areas delivered by local government contracts with private providers.

Conclusion
In this study, we examined the question of whether nonprofit contractors have a com-
petitive advantage over for-profit ones when it comes to providing services for gov-
ernment. Based on the logic of principal–agent theory and the assumption of goal
alignment between public and nonprofit organizations, we proposed six hypotheses
708 Nonprofit and Voluntary Sector Quarterly 42(4)

regarding differences in the way public officials perceive, structure, and manage their
contractual relationships with nonprofits compared to for-profits, and five hypotheses
regarding the comparative performance of nonprofit and for-profit firms. We used
data from a national survey of local government contracts with private service provid-
ers to test the hypotheses.
Out of the six contracting process hypotheses tested, three received strong support
and two partial support; the remaining hypothesis was rejected. In contrast, all five of
the performance hypotheses were rejected. In short, nonprofit organizations appear to
enjoy a variety of trust-related advantages over their for-profit counterparts in the
contracting process, though on the whole they do not actually outperform their for-
profit competitors in completion of the contracted work. This research suggests that
contracting governments should carefully consider the heuristics they use in selection
of contracting partners. While it is possible that nonprofits yield advantages to govern-
ment that are outside the range of the performance variables measured here, our
research suggests that nonprofits enjoy a “halo effect” in the contracting process that
may not be merited by performance outputs.
The empirical analysis provides some evidence that public officials have greater
trust in nonprofit service providers than in for-profit ones. Higher levels of trust in
nonprofits may increase adaptability and resilience on the part of principals and agents
when faced with the need to resolve conflicts and modify agreements. Public officials
also report monitoring nonprofit contractors less frequently than for-profit ones, sug-
gesting that contracting with nonprofits helps to reduce contract administration costs.
Contracting with nonprofits does not reduce screening costs, however, since the results
show public officials subject nonprofit and for-profit providers to the same level of
scrutiny during the selection phase of the contracting process.
We found some support for the proposition that nonprofits are granted greater dis-
cretion than for-profits, perhaps due to the perception that goal alignment reduces
exposure to moral hazard. Even stronger support was found for the propositions that
nonprofit contractors are awarded contracts of longer duration and contracts for the
delivery of services characterized by higher levels of task complexity than those
awarded to for-profit contractors. The practice of awarding nonprofits longer term
contracts should help public officials reduce or postpone the various transaction costs
incurred during a formal bidding process.
Across the entire range of public services outsourced by local governments, we fail
to find much evidence of nonprofit superiority in contractor performance. Nonprofit
contractors perform about as well as for-profit ones in regard to cost of service deliv-
ery, quality of service, responsiveness to the government’s needs, and compliance with
the law although they may slightly outperform for-profits in the area of customer sat-
isfaction. The lack of profit motive and fewer incentives to invest in innovations may
help explain the lack of cost or quality advantages from hiring nonprofits to deliver
services. Another factor preventing nonprofits from outperforming for-profits is gov-
ernment’s tendency to hire nonprofits to deliver services in areas with greater need and
to segments of the population who are more difficult to reach (Bryce, 2005; Salamon,
Witesman and Fernandez 709

1995). The requirement to deliver services to such groups can discourage for-profit
firms from even bidding on those contracts.
We find at least some evidence that public officials trust and grant more discretion
to nonprofit contractors than for-profit ones. We find stronger evidence that public
officials monitor nonprofits less frequently than for-profits, award them contracts of
longer duration that for-profits, and award them contracts for services that are more
difficult to specify and measure than those contracted out to for-profits. While these
differences are statistically significant and point to some degree of competitive advan-
tage for nonprofits in the government contracting arena, it is essential to examine the
magnitude of this advantage. Just how much of a real advantage do nonprofits have?
The results of our analysis indicate that the advantage may be quite modest and
tenuous. Public officials screen nonprofit contractors just as rigorously as they do for-
profit ones. Statistically significant differences in the amount of trust public officials
have in nonprofits and in the amount of discretion granted to them vanish in a multi-
variate analysis including controls for a wide range of covariates. Moreover, the dif-
ference in the frequency with which public officials monitor nonprofits appears to be
rather small in terms of substantive significance and unlikely to result in considerably
lower contract administration costs, even though we cannot estimate these costs
directly. Finally, nonprofits in general perform about as well as for-profits. All this
suggests the need to avoid overstating the benefits of choosing nonprofits over for-
profits based on the current evidence.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of
this article.

Notes
1. The percentage of contracts in our sample that are for public works/transportation and
cultural and arts programs are slightly higher and lower, respectively, compared to those
reported in ICMA’s 2002-2003 Alternative Delivery Survey.
2. Various tests for internal consistency and discriminant validity were performed to further
justify the use of these scales. Detailed information is available from the authors on request.
3. For comparison purposes, we also completed difference of means tests. The results of these
tests are as follows: cost (t = 1.27, p = .20); quality of work (t = 0.79, p = .43); responsive-
ness to government requirements (t = –0.36, p = .72); compliance with the law (t = 0.10, p =
.92); and customer satisfaction (t = 1.36, p = .18).
4. Cooperation is measured using the following Likert-type survey item: “We always work
together with the contractor to come up with solutions to problems.” Response categories:
1 = strongly disagree to 5 = strongly agree.
710 Nonprofit and Voluntary Sector Quarterly 42(4)

5. Trust is likely to serve as an antecedent to the frequency of monitoring and the amount of
discretion given to the contractor. Hierarchical regression was used, introducing the vari-
able trust first and then the variables monitoring and discretion. This had no meaningful
influence on the results of the analysis of covariance (ANCOVA) tests or ordered probit
model (OPM) regressions.

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Author Biographies
Eva M. Witesman is an assistant professor of public management at the Romney Institute of
Public Management at Brigham Young University. Her research interests include public service
configurations, public service values, and disaster response philanthropy.

Sergio Fernandez is an associate professor of public affairs at the School of Public and
Environmental Affairs at Indiana University, Bloomington. His research focuses on public
management and organization theory with a focus on privatization and contracting out, public
sector leadership, and organizational change and innovation.