124 5: Th eories of Public Management
Governance
Although governance is the subject of Chapter 9, here we take up several impor-
tant implications of governance for management theory. Th e implications for
governance of management by contract have only recently begun to be explored.
Milward and Provan (2000a) showed that as of 2000 the eff ect of contracting on
citizens’ perceptions of the legitimacy of the government had not been addressed,
nor had questions of how to govern networks. Although our knowledge has de-
veloped over the intervening years, the questions still remain. Th e answers will
almost certainly center on how networks are managed, since the hollow state’s
main task is to “arrange networks rather than to carry out the traditional task of
government, which is to manage hierarchies” (Milward and Provan 2000a, 362).
Note that this implies a need for theories of management to incorporate
networks and contract management into our understanding of public admin-
istration. Our skepticism of the ability of principle-agency theory to adequately
explain management by contract is now more clear: A hollow state is not en-
gaged in that type of relationship. Indeed, as demonstrated by David Van Slyke
(2007), agency theory assumptions need to be relaxed per Kathleen Eisenhardt’s
suggestion to account for the contextual elements of the relationship, such as the
length of time the parties have been in contact and the level of confl ict, in order
to accurately explain contracting relationships. By comparing agency theory with
stewardship theory as proposed by James H. Davis, Lex Donaldson, and F. David
Schoorman (1997), Van Slyke shows that contracting relationships can change
over time, as trust replaces some of the need for monitoring. Relationships that
start out with an emphasis on control, per agency theory, can change to ones
based on goal convergence. However, he also shows that there is room for the de-
velopment of a hybrid approach that combines agency theory with stewardship,
since reputation can be developed in a steward relationship, but then used as a
reward to promote goal alignment, per agency theory.
One result of contracting that is important for governance is the increased
infl uence of organized interests on agency decisionmaking (Kelleher and Yackee
2009). Simply put, contracts open a new way for organized interests to lobby
public managers, which Christine Kelleher and Susan Webb Yackee identify as
a “contract pathway.” Th is pathway has implications for governance, since the
pathway raises the issue of trade-off s between equity and responsiveness (Wil-
son 1989). Kelleher and Yackee also point out that contractors may be viewed in
two ways: positively as partners or negatively as special interests. Th ese concerns
about governance and politics surrounding contracting—as opposed to just mar-
ket effi ciency—indicate broader factors at play beyond what is predicted by NPM.
Amir Hefetz and Mildred Warner (2004) show that managers understand the
importance of monitoring, but also see the need for responsiveness. Importantly,
they point out that agencies also contract back in as a way of carrying out their
duties of providing quality service in a responsive manner.