Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: Competition between private and public firms can increase service quality and reduce public costs in markets for tax-financed welfare services with non-contractible quality. Synergies arise from combining high-powered incentives for quality provision (emanating from private firms) with low rents (public firms). However, sometimes, the optimal regulation requires the government to provide public firms with better funding than private competitors, e.g. by paying them higher prices or covering their deficits. This additional compensation is not tied to any additional verifiable quality obligations and may therefore violate competitive neutrality rules incorporated to various areas of legislation.

Keywords: public-private competition; competitive neutrality; mixed markets; public option; ownership; competition; incomplete contracts; strategic ambiguity; merit goods; SGEI

JEL-codes: H44; L33; L44

52 pages, First version: August 2017. Revised: September 2017.

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