Cultural Biases in Government Make-or-Buy Decisions: Evidence from a Regression Discontinuity Approach∗ Laure Athiasyand Pascal Wicht University of Lausanne November 11, 2013 Abstract What determines governments' decisions for the mode of provision of their ser- vices? While the theoretical and empirical literature on this issue has mostly con- sidered technical dimensions (contractual and public choice aspects), this paper emphasizes the role of culture and quantifies it. We build a representative database for contracting choices of municipalities in Switzerland and exploit the discontinuity at the Swiss language border at identical actual set of policies and institutions to analyze the causal effect of culture on the choice of how public services are provided. We find that French-speaking border municipalities are 50% less likely to contract with the private sector than their German-speaking adjacent municipalities, and this effect prevails over the effect of any technical dimension. Systematic differences in the level of confidence in public administration and private companies potentially explain this discrepancy in private sector participation in public services provision. Keywords: Contracting out, Make-or-buy decision, Local public services, Culture, Regression discontinuity design JEL codes: D23, D73, H11, L33, Z10 1 Introduction The issue of how effectively to deliver public services to populations is a central issue. We know that public services are a key determinant of a nation's competitiveness, of the quality of life that is not measured in income per capita, and that they are also an important lever of many poverty reduction strategies. It is a main focus on policy debates in the world. For instance, the World Bank's 2004 World Development Report had public service delivery as a headline issue. The experience of recent years has often put weight on private alternatives, such as public private partnerships and contracting ∗We thank Marnix Amand, Peter Egger, Paul Grout, Mario Jametti, Michael Klien and Thierry Madi`esfor helpful comments. We also thank participants to seminars and conferences at Sorbonne Business School, University of Lausanne, KOF-ETH Zurich,and international conference "Contracts, Procurement, and Public-Private Arrangements" in Florence. We acknowledge financial support from the Swiss National Science Foundation Grant 100018-130459. yCorresponding author: [email protected] 1 out, for services ranging from education, health care and transportation to waste collection and street repair. In addition to the normative question of what role a government should assume in providing public services, this issue has also raised the positive question of what determines, in practice, government decisions for the mode of provision of their services. To explain government make-or-buy decisions, the theoretical and empirical literature has mostly considered technical dimensions (contractual and public choice aspects). One dimension relies on transaction costs and is similar to private sector make or buy decisions, that is, decisions are guided by efficiency considerations. A central prediction of these efficiency-based theories is that services that are asset specific or difficult to measure are less likely to be contracted with a private operator (Williamson, 1985; Hart, Shleifer, and Vishny, 1997). This is a pure economic trade-off, taking as given the preferences of the city administrator. But these preferences may be subject to political considerations: The private benefits to politicians of keeping service provision inside the government (Boycko, Shleifer, and Vishny, 1996). This view holds that factors (e.g., citizen discontent, tight budgets) that reduce the political benefits from in-house provision make private provision more likely. A mixture of both views is given by Levin and Tadelis (2010): Services that are characterized by high transaction costs of contracting and services that are ranked high by city managers in terms of resident sensitivity to quality are less likely to be privately provided. However, we could also expect that the preferences of the city administrator may be subject to cultural considerations: The beliefs regarding the relative efficiency of public and private provision of public services, ceteris paribus. In fact, while proponents of contracting out public-services provision to the private sector argue that it leads to efficiency gains while ensuring general public interest attributes through contractual reg- ulation, opponents argue that it reduces costs at the expense of quality and that general interest is not ensured by incomplete contractual regulation1. As beliefs and values affect individual and group behaviors, they are a central determinant of institutional arrange- ments: "Institutional arrangements and policies, norms, and everyday practices express underlying cultural value emphases in societies." (Schwartz, 2004)2. Our goal in this paper is to investigate for the first time the role of culture for the mode of provision of public services, and to quantify it as well as to assess its relative importance compared to technical considerations. Quantifying how much cultural factors explain economic decisions is the main contribution of the paper. While our paper is mostly empirical, we frame it around a random-utility discrete-choice model of provision mode decision. It incorporates the two traditional efficiency and political dimensions analyzed in the literature on provision mode choices, to which a cultural dimension is added. We estimate our theoretical model on the provision modes of public services at the level of Swiss municipalities. The municipal level is an interesting case to deal with contracting 1The pure privatization | i.e. the case where the State does not intervene in the provision of services and lets the private market determines the offer | is explicitly excluded of our scope. Consequently, this study does not focus on the fact that services are provided or not, but on the way these services are provided (in-house provision, public or private contracting), knowing that both the determination of qualitative and quantitative dimensions of the provision and the ultimate responsibility still remains in the hands of the public authority, whenever the service is contracted or not. In other words, the central issue of this study is neither a question of "More or less state" nor a question of redistributive policy. 2There is a growing literature looking at the effect of cultural background on economic outcomes. Among others, Algan and Cahuc (2009) establish a link between cultural differences and the fact that countries adopt different policies related to employment protection and unemployment insurance. Eu- gster, Lalive, Steinhauer, and Zweim¨uller(2011) show in turn that culture has a causal effect on the preferences for redistributive policies and hence on implemented redistributive policies. 2 choices as many municipalities make decisions about service provision in parallel while they provide a wide range of services, from very simple to very complex ones. Switzer- land, with its four languages that are geographically clearly delimited, is a great case to study the impact of culture on economic decisions, in particular related to the mode of provision of public services. The explanations of the links between culture and language are manifold. The so-called Sapir{Whorf hypothesis (Sapir (1921), Whorf (1940)) focuses on intrinsic characteristics of the languages. Grammatical structures as well as the vo- cabulary are supposed to affect the perception of concepts (e.g. time and space, colors, past, present and future) and the worldview. Recent contributions in this field include Boroditsky, Fuhrman, and McCormick (2011), who show that language patterns provide Mandarin speakers and English speakers with a very different perception of the concept of time. Language also captures the vertical and horizontal transmission of values (Bisin and Verdier, 2001). The vertical channel to the extent that the native language to which we are exposed during childhood and adolescence is likely to be an important predictor of our values during adulthood. The horizontal channel in the sense that language is central to any type of social interaction. People sharing a common language are more likely to form a social network, and then, to share common values and common cultural traits. Finally, among the channels of transmission of cultural traits, language is the mostly inherited factor, which allows avoiding any problem of reverse causality. In addition, a particular feature of Switzerland is the so-called Roestigraben, the lan- guage border between French and German areas. Whereas the share of French speakers is about 90 percent in border municipalities in the French side of the border, this share drops to less than 5 percent, , within a distance of 5 km, in municipalities in the German side (Eugster, Lalive, Steinhauer, and Zweim¨uller,2011). However, we do not focus on citizens' individual decisions but rather on decisions taken by elected authorities, which use majority rules, knowing that small minorities tend to be under-represented in polit- ical bodies. We can consider then that the fraction of French-administratively speaking Swiss municipalities falls from 100 % to 0% across the border(and vice versa for German- administratively speaking Swiss municipalities), i.e. we have a sharp cut-off between French and German areas. Furthermore, there is no associated change in geography at