Markets and Hierarchies in Public Services: Incentives, Institutions, and Politics

Abstract

By the 1990s a consensus emerged that traditional bureaucratic forms of service delivery were incapable of increasing efficiency and quality. Government reformers turned instead to a variety of new organizational innovations, quasi-markets central among them. Quasi-markets raise a range of theoretical and empirical problems including agency dilemmas, information costs, shifting incentives and motivations, partial implementation, unequal access, insufficient accountability, and policing and enforcement. Introducing market mechanisms in the delivery of social services is an institution-intensive reform best accompanied by complementary policies to enhance the collection and dissemination of information, to permit personnel flexibility, and to manage the entry and exit of private providers. Nonetheless, quasi-markets often have side effects in narrowing employee incentives, aggravating social inequality, and providing additional incentives for opportunism, for which reforming governments have sought further compensatory measures. Politically, quasi-markets strengthen the short route of accountability (from consumers to providers), but can weaken the already tenuous long route (from consumers to politicians to providers). Examples and illustrations are drawn from recent reform experiences in Latin America.