Mixing Public and Private Service Providers and Specialization

Economics

Further details

(with Hans Gersbach)

We analyse the reform of public sector welfare services such as education and health. In this paper we argue that a mix of a private and a public service provider can be superior to full privatization. Competing private suppliers offer the same service range. The customers are of different types and high (low) cost types are oversupplied (undersupplied). A mixed institution allows the competing suppliers to specialize. The public supplier specializes in high-cost types and the private supplier specializes in low-cost types each receiving the first best service.