Contracting out government services, especially IT services, has accelerated in recent years in the United States. Based on literature in privatization and contracting out, the authors build a model of the government decision to contracting out e-government services. The model includes two groups of environmental factors, those associated with political rationality and those associated with economic rationality. To empirically test the model, a panel data set is designed using data from recent NASCIO and NASPO surveys and macro level state data. Important factors affecting the contracting out decision are the partisan composition of legislatures, state population size, the state market composition for e-government services, and the competitiveness of the bidding process. Political and legislative factors appear to be more important than productive economic considerations. One of the major results of this work is to recognize that arguments associated with markets and economic rationality are clearly in part politically motivated.