Please cite this article in press as: Desrieux, C., et al., Putting all one’s eggs in one basket: Relational contracts and the management of local public services. J. Econ. Behav. Organ. (2012), doi:10.1016/j.jebo.2012.03.001 ARTICLE IN PRESS G Model JEBO-2904; No. of Pages 20 Journal of Economic Behavior & Organization xxx (2012) xxx–xxx Contents lists available at SciVerse ScienceDirect Journal of Economic Behavior & Organization j ourna l ho me pag e: www.elsevier.com/locate/j ebo Putting all one’s eggs in one basket: Relational contracts and the management of local public services Claudine Desrieux a , Eshien Chong b , Stéphane Saussier c,* a ERMES-University of Paris II, France b ADIS-University of Paris Sud 11, France c IAE-Sorbonne Business School, France a r t i c l e i n f o Available online xxx JEL classification: D86 K23 H42 L33 L95 Keywords: Bundling Contract Public–private partnerships Local public services a b s t r a c t French municipalities often contract out the provision of local public services to private companies, and regularly choose the same private operator for a range of different services. We develop a model of relational contracts that shows how this strategy may lead to better performance at lower cost for public authorities. We test the implication of our model using an original database of the contractual choices made by 5000 French local public authorities in the years 2001, 2004 and 2008. © 2012 Elsevier B.V. All rights reserved. 1. Introduction During the last few decades, the role of the private sector in the management of public services has been the subject of some debate, particularly within local governments. In many countries, local public authorities such as municipalities must provide a wide range of services (e.g. street repair, water management, sewage treatment and disposal, urban transport). Recent data show the increasing involvement of the private sector in the management of these services. In the U.S.A. for example, around one third of residential solid waste collection, solid waste disposal and street repair services are provided through contracts with private firms (Levin and Tadelis, 2010). In Europe, the use of outsourcing has yielded even greater levels of success: 63% of medium-sized French cities contract out their water treatment and distribution functions, and 58% of them outsource their sewage treatment (Dexia Crédit Local de France, 2006). Although the debate about the management of local public services focused first on the determinants of privatization (Williamson, 1999; Hart et al., 1997; Lopez de Silanes et al., 1997), there is now a fair degree of interest in some of the other issues involved. For example, some authors have compared the selection mechanisms (competitive bidding and negotiation) in order to determine their relative efficiency (Bajari et al., 2009). Revenue sharing arrangements have also been studied (Engel et al., 2001, 2006). The question of what determines the choice of private operators, however, has received rather less attention. Interestingly, local public authorities tend to contract out several different services to the same operator, * Corresponding author. E-mail addresses: claudine.desrieux@u-paris2.fr (C. Desrieux), stephane.saussier@gmail.com (S. Saussier). 0167-2681/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2012.03.001