The Choice Between the In-house Provision and the Competitive Out-house Provision of Public Services

Working Papers 216 Eero Lehto

This study focuses on the production welfare services which are purchased by the government. We consider whether the delivery of the service should be public or private. The social impact of the service is determined by the satisfaction of unforeseen individual needs. Assuming that the information about these needs is ex post observed only by the producer of the service favours public production. Auctioning the right-to-produce contract, however, selects the most cost-effcient private supplier. Whether private production is optimal resolves from the trade-off between cost effciency and a failure in meeting individual needs. We also analyse investments in monitoring.


Keywords: Private or public, right-to-produce auction, service production
Published: 1.1.2006
JEL: L33, L80
ISBN: 952-209-020-4
ISSN: 1795-1801
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