Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81338
Authors: 
Lindqvist, Erik
Year of Publication: 
2008
Series/Report no.: 
IFN Working Paper 750
Abstract: 
A 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.
Subjects: 
Privatization
Public Sector Contracting
Credence Goods
Incomplete Contracts
Contracting Out
Residential Youth Care
Juvenile Delinquency
JEL: 
H11
H40
L32
L33
Document Type: 
Working Paper

Files in This Item:
File
Size
375.18 kB
170.68 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.