Private Transaction Costs in Public Sector Contracting

Private companies contract with governments to deliver a broad range of goods and services such as construction, infrastructure, health care, facility management and much more. Such relationships implicate transaction costs, broadly understood as “all the cost which do not exist in a Robinson Crusoe economy.” (Cheung, 1998; 515). However, whereas most previous literature has focused on the transaction cost considerations of governments in the public/private contracting relationship, much less scholarly attention has been devoted to the transaction costs of private companies in the relation. This paper aims to address part of this knowledge gap by examining the pre-contractual transaction costs of private companies vending services and products in contracts with governments. First, we draw on transaction cost theory and broader economics and industrial organization literature to develop a framework that combines theoretical and firm-, contract-, and government-level transaction cost factors. Second, we utilize data from a unique survey of Danish companies to examine the magnitude and determining factors of companies’ transaction costs across eight industries that regularly contract with the public sector. Our findings underline the need for taking private companies’ transaction costs more seriously in the planning and execution of public sector contracting to maximize the likelihood of win-win outcomes for government and business.