In this paper we apply a Transaction Cost Theory framework to analyse the use and effects of contracting out in Swedish local government. During the last decade Swedish local authorities, like in many other countries, have, to a larger extent, started to contract external subcontractors to fulfil their responsibilities towards its citizens. It is not only in the traditional subcontracting sectors such as housing, infrastructure, and technical services that this trend is evident, but also in policy areas like education, social care, and elderly care. In fact, very little is known about the overall effects of, and the mechanisms underlying, governance choices. The overall results corroborate transaction cost reasoning. Supplier competition and specificity have anticipated effects on municipal de-integration. Too little, but not too much, use of contracting out, in relation to theoretical predictions, worsens performance. The latter aspect is not fully in accordance with TCE-propositions.