The Privatization of Social Services in Chile: an Evaluation

We examine the privatization of Chilean social services that began in 1981. We conclude that the reform has had a positive impact by providing competition to public providers (health and education) and insulation from political capture (pension funds). The major lesson, however, is that the full benefits from privatization-cum-competition are slow to arrive and require able regulators to achieve them. Some of the benefits of competition are lost through rent dissipation, especially in the providers’ search for the more attractive customers. These rents are due in part to the limitations of consumers when deciding on highly complex issues under asymmetric information. Another source of inefficiency is regulations introduced to avoid moral hazard problems, but which also have the effect of limiting competition. The performance of social service markets is improving, and this can be attributed to changes in regulation (fewer restrictions and more transparency), the consolidation of the industries, and hypothetically, better decisions on the part of consumers.