Privatization of Credence Goods: Theory and an Application to Residential Youth Care
AbstractA wide range of services provided by the public sector are credence goods, i.e., services for which the producer has private information whether a certain treatment is needed or not. This paper studies how ownership affects the incentives for producers to reveal such information to public procurers. I develop a model where procurers buy a more extensive treatment in case quality is high. Private firms have strong incentives to reduce cost and must be given rents in order not to shirk on non-contractible quality. The existence of rents makes private firms try to induce demand for unnecessary treatments. Public sector managers have no incentive to cut cost, implying that optimal contracts don't entail rents unless quality is very important. Public sector managers instead use their informational advantage to avoid unpleasant tasks. Empirical evidence from residential care for teenagers with behavioral problems supports the model's predictions. Private ownership prolongs the duration of treatment by more than a year, doubling total cost. Unlike private facilities, public facilities are much more likely to initiate treatment breakdowns for teenagers that are particularly burdensome to treat.
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Bibliographic InfoPaper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 750.
Length: 48 pages
Date of creation: 04 Jun 2008
Date of revision: 23 Sep 2008
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Privatization; Public Sector Contracting; Credence Goods; Incomplete Contracts; Contracting Out; Residential Youth Care; Juvenile Delinquency;
Find related papers by JEL classification:
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- H40 - Public Economics - - Publicly Provided Goods - - - General
- L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-05 (All new papers)
- NEP-CTA-2008-07-05 (Contract Theory & Applications)
- NEP-PBE-2008-07-05 (Public Economics)
- NEP-URE-2008-07-05 (Urban & Real Estate Economics)
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- Bennmarker, Helge & Grönqvist, Erik & Öckert, Björn, 2013.
"Effects of contracting out employment services: Evidence from a randomized experiment,"
Journal of Public Economics,
Elsevier, vol. 98(C), pages 68-84.
- Bennmarker, Helge & Grönqvist, Erik & Öckert, Björn, 2012. "Effects of contracting out employment services: Evidence from a randomized experiment," Working Paper Series, Center for Labor Studies 2012:21, Uppsala University, Department of Economics.
- Bennmarker, Helge & Grönqvist, Erik & Öckert, Björn, 2012. "Effects of contracting out employment services: Evidence from a randomized experiment," Working Paper Series 2012:19, Uppsala University, Department of Economics.
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