Spurred by the increasing privatization of government services, a growing number of organizations operate in “quasi-markets” (Ferlie, 1994, 2002), spaces where profit seeking firms compete with public sector organizations for service delivery. These firms are encouraged by government to enter these markets often on the grounds that service delivery by the private sector is inherently done more efficiently than in the public sector, motivating management scholars to frame the discussion of the privatization of public services as a sort of “make versus buy” decision for government (Shleifer, 1998). This Cosian concept has evoked strands of Agency and Property Rights Theory to cite the differences in managerial structure of firms and their competing public counterparts (Alchian, 1965; Ferlie, 2007; Perry & Rainey, 1988) as sources of inherent market-based efficiency. 

However, studies comparing the relative efficiency of profit-seeking firms competing with public organizations have been decidedly mixed, often finding no efficiency differences (Atkinson & Halvorsen, 1986; Delmas & Tokat, 2005; Estache & Rossi, 2002). This raises questions about the power of Agency and Transaction Cost theories to explain relative differences in efficiency in quasi-markets, particularly because these theories largely ignore the environmental complexities that define quasi-markets. The most glaring of these environmental complexities involves reliance on public revenues, ethical concerns, and the resulting external control issues.

Firms in quasi-markets often have revenue streams composed at least in part of payments, direct or indirect, from government bodies (Wamsley & Zald, 1973). Governments are notoriously heavy handed, particularly regarding firms that struggle with legitimacy and meeting societal ethical considerations, using the control that accompanies their resource streams to impose structural changes that better address political and societal goals (Froelich, 1999; Gronbjerg, 1991). Thus, while for-profit firms operating in quasi-markets are traditionally thought to be more efficient, Resource Dependence Theory (Pfeffer & Salancik, 2003) suggests that these resource effectiveness gains might be mitigated by dependence on public resources for organizational survival by imposing structure these firms much more like the public organizations with which they compete, .

Using the higher education sector as a unit of analysis, this study examines the effects of Resource Dependence on the technical efficiency of proprietary firms competing with public organizations in quasi-markets. With organizational and financial data from the US Department of Education, this study first uses Data Envelopment Analysis to compute the efficiency of proprietary 2-year higher education organizations, then compares these efficiency scores to their public sector counterparts. Then, controlling for other factors, this study measures the impact of dependence on public revenues on organizational efficiency for both sets of organizations.

The ethical issues, federal resource dependence, and resulting policy corrections lend the higher education space well to this analysis. If resource dependence negatively affects the efficiency of proprietary organizations, given that associated ethical issues make government oversight necessary, our society could stand to learn much more about the potential lack of inherent efficiency gains present in other sectors government has looked to privatize.