Local governments have been searching for alternatives replacing their inefficient and ineffective direct supply of public services. One of the alternatives is to contract the public services to the private sector. This paper tries to not only analyze the factors determining local governments’ contracting-out decision, but also examine the efficiency of the contracting-out in terms of the agency problem, extent of competition, externalities, and relative transaction costs of public and private production. By doing so, this paper suggests policy implications to the case of South Korea. 키워드 : Local Governments, Contracting-out, Efficiency, Public Services