Although a vast literature explores government contracting out for the delivery of publicly financed services, comparatively little of this analysis, whether descriptive or explanatory, focuses on the American states. Accordingly, the present research has two primary goals. It first examines the extent of contracting out by state agencies and the perceived effects of this activity on the quality and costs of service delivery. The second aim is to develop a model of contracting out by state agencies and to test it empirically using appropriate hierarchical linear modeling (HLM) statistical techniques. The analysis incorporates individual agency variables (level I) and contextual information regarding the states (level II). The findings reveal—not surprisingly—that contracting out for the delivery of services by state governments is very common, employed by more than 70 percent of responding agencies. State agencies, however, do not seem to achieve the main goals that are advocated by proponents of contracting out, at least not routinely. About half of the agencies engaged in contracting out for the delivery of services acknowledge improved service quality, but barely one-third report decreased service costs. Results of the HLM analysis indicate that most of the variables that help to explain contracting out by state agencies are agency-specific, and that the state-level contextual variables, with the exception of fiscal factors, play a much smaller role. Consistent with some literature, this overall finding suggests that privatization has entered a new, less ideological phase, in which it has become an accepted practice across the American states, subject mainly to the circumstances of individual agencies.