The paper presents a theoretical model illustrated how social and economic factors influence on the decision undertaken by the municipals to contract out of publicservices. The main hypotheses are empirically tested. The empirical study is in line with the theoretical one.

The positive effect of harder budget constraint of municipality on the probabil ity of attracting private companies in the Russian market of refuse collection is found. The results also show that the lower average costs of production do not provide incentives to municipal authorities to contract out refuse collection. Households’ welfare and investment activity in the housing sector favors the higher probability of attracting private companies into the sector.