Markets for Public Services: Less Might Be More

• Authors: Benito Arruñada.
• BSE Working Paper: 1473 | January 25
• Keywords: competition , welfare , Incentives , interbank markets , Bureaucracy , user fees , user choice , expense centers , public services
• JEL codes: H11, H42, H51, H52, K23
• competition
• welfare
• Incentives
• interbank markets
• Bureaucracy
• user fees
• user choice
• expense centers
• public services

This article suggests that the partial but strong incentives that characterized privately valuable public services in the classical ‘liberal’ state might be more effective than the comprehensive but weak incentives introduced by the ‘internal markets’ created when reforming the welfare state. The article compares three organizational forms: (1) the bureaucratic expense center used to provide privately valuable services such as healthcare through the organizations created by the welfare state; (2) the internal markets introduced to reform them; and (3) the hybrid solutions that have been used by the liberal state since the 19th century to provide such privately valuable services. This comparison suggests that market forces may play a better role in organizing public services when they are limited to a few variables, which makes stronger incentives possible and, at the same time, reduces the need for extensive planning and supervisory staff.