Competitive Neutrality and the Cost and Quality of Welfare Services

Abstract

Competition between private and public firms can increase service quality and reduce public costs in markets for tax-financed welfare services with non-contractible quality. Synergies arise from combining high-powered incentives for quality provision (emanating from private firms) with low rents (public firms). The optimal regulation directs the government to provide public firms with better funding than private competitors, e.g. paying them higher prices or covering their deficits. This additional compensation is not tied to additional verifiable quality obligations. Competitive neutrality regulation makes mixed markets less attractive; especially so when com- petition is lax. Then, the best alternative is pure public ownership.