The 'Lakewood Plan' of municipal service contracting is a system which allows California cities to purchase basic local government services from county government departments rather than produce the services in-house.1 Services commonly purchased on contract by cities include street rapair and lighting, traffic signals, libraries, building and safety inspections, engineering services, animal control, and solid waste disposal. In terms of revenue collected, however, general law enforcement and traffic law enforcement are the most important services provided by contract. 2 The few previous studies of intergovernmental contracting have focused solely on the impact of the system on the purchasing cities, for example, by comparing the expenditures of municipalities that purchase services from the county with the spending levels of cities that produce services in-house (Deacon, 1979;Mehay, 1979). To date, no analysis has been undertaken of the potential effects of contract supply on the county departments which supply the services.
The goal of this paper is to analyze the differences in incentives to efficient production in a government department which supplies a portion of its services on contract versus a department which does not contract at all. In Section 1 the general theory of bureaucracy is employed to analyze the behavior of county agencies that supply services on contract. The basic hypothesis derived from the analysis is that the incentives for efficient production will be stronger for contract suppliers than for government bureaus that exchange their output for the usual lump sum budget appropriation. This hypothesis is examined empirically in Section 2, employing data from county sheriff departments in California. Section 3 presents the summary and conclusions.