Political Interests, Fiscal Capacity, Price Priority, and Employee Safeguards in Outsourcing Contracts

Outsourcing comes with potential negative employee-related social costs since private sector organizations are not obliged to uphold public personnel regulations. In response, some local governments specify contract rules safeguarding outsourced employees. To understand why, we combine literature on outsourced employees and incomplete contracts. We hypothesize that employee safeguards are a function of local governments’ political interests, fiscal capacity, and priority of contract price. Collaborating with purchasing practitioners, we develop a safeguard catalog and determine the use of safeguards in a unique dataset of 3,396 documents related to 247 Danish tenders involving the transfers of employees from public to private employment. We find that local governments with less fiscal capacity and more price orientation include fewer safeguards. These findings signal that certain local governments have more willingness and capacity to safeguard employees and thus potentially decrease unaccounted employee-related social costs of outsourcing.