The Limits of Government Outsourcing: Property Tax Re-Assessments in India

Many theories of outsourcing presume private firms are more efficient producers of goods and services, but that contracting frictions mean that firms do not internalize the government’s objective function. But perhaps, for some tasks, the government can actually be more productively efficient? We study this question through an experiment in Chennai, India, where the government randomly selected neighborhoods to have property tax assessments determined by private firms contracted by the government, rather than government tax inspectors. We show that inspections by government tax inspectors yielded almost double the increase in tax revenue as those done by private firms. They were also more accurate, as judged by comparing new assessments to independent assessments done by third-party surveyors we hired. Difficulties contracting with the government discouraged many competent firms from bidding. Perhaps as a result, government inspectors had higher skills and put in more effort than the workers at the private firms. Importantly, the government inspectors had more authority to enter properties, and soft knowledge on how to find properties, both of which may be hard to transfer even to higher quality firms. The results suggest that the limits to government outsourcing may go beyond multitasking issues.