PRAGUE ECONOMIC PAPERS, 4, 2009 l 327 TESTING THE VALIDITY OF THE BROWN-POTOSKI MODEL IN THE CZECH AND SLOVAK REPUBLICS Jan Pavel, Emilia Sičáková-Beblavá* Abstract: This paper is based on the new institutional economic approach, which focuses on analysis between services features (asset speciicity, outcome measurability) and their eligibility to contract out. This issue, which de facto constitutes one of the subsets of the “make or buy decision” issue, is also analysed by the so-called Brown-Potoski model. It analyses the relations between selected features of a demanded service and its suitability or unsuitability for outsourcing, whilst making use of information about transaction costs economy. Using data from 100 Czech municipalities and 100 Slovak municipalities, the viability of the Brown-Potoski model is tested. The results of the research show that a connection was identiied between the measurability of the required service and its suitability for external provision, but the relationship between the speciicity of investments and the suitability for external provision was not. The reason is probably the previous inancial demands of the initial investment, which is, above all in the case of small municipalities, beyond their budgetary means. Keywords: Brown-Potoski model, Czech Republic, public services, Slovak Republic, transaction costs JEL Classiication: D23, H42, H72 Introduction After the fall of the Communist regime in 1989, extensive institutional and economic changes in the Central European countries took place, which lead, among other things, to the establishment of the system of municipality-based local self-government. Both in the Czech and Slovak Republics, the local government’s sub-sector presently manages considerable amounts of public funds 1 and uses a part of them for the provision of services for its citizens. In the course of the political transition, the Slovak and Czech Republic decentralised the provision of various services, many of which are now decided by local self-government. Municipalities have the power to decide which service will be provided (apart from those which are stipulated by law) and the manner of their 1 In 2006, the expenditure of municipal budgets in the Czech Republic constituted 7.7 % of GDP; in Slovakia it was by 2 percentage points less, i.e. 5.7 % of GDP. * Jan Pavel, University of Economics, Prague (pavelj@vse.cz); Emilia Sičáková-Beblavá, Comenius University, Bratislava (ema@transparency.sk). DOI: 10.18267/j.pep.357