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Complementary Issues in Quasi-Market Design

Even though quasi-markets are not widespread, the record of reform to date suggests that it is not enough to create quasi-markets and leave them to function on their own. Rather, reforms need to take into account a series of complementary factors that help promote the optimal functioning of quasi-markets. This section considers several factors—information flows, flexibility, and barriers to entry and exit—that are crucial in basic design of quasi-markets, and the next section considers further issues in regulation, correction, and compensation.


Regardless of the administrative model adopted, the provision of healthcare and education to millions of people in diverse conditions and across vast territories creates generic information problems. Problems of information cost and asymmetry are large even in hierarchical, bureaucratic service delivery, but they increase with the introduction of quasi-markets.12 If competition is for consumers, then full, intelligible, timely information has to get to them (Greener and Powell 2009). If competition is for contracts, then information on the performance of contracted providers has to get to the government. Information collection and processing is costly for all parties and should be weighed against other cost reductions expected from quasi-markets.

One of the major problems in the hierarchical, bureaucratic model is that central policymakers have a hard time collecting information on quality of services and designing policies to improve quality. For advocates of quasi-markets, the consumers who exit particular schools or hospitals should, in principle, resolve much of this information cost by signaling directly which units have low-quality services. However, the meaning of this signal is often ambiguous. Government regulators cannot know the meaning of, or reasons for, exits (many of which may have little to do with the overall quality of instruction) unless they conduct exit interviews (adding to the overall information burden and cost). Moreover, exit is costly, and families are likely to delay it until conditions get very bad. Generally, voice and complaints provide much more timely and specific information on problems, but, as discussed below, the exit option reduces incentives to invest in voice.

In voucher schemes or demand-side subsidies, in which payment follows the patient or student, the government payer (monopsonist) sets the prices and providers compete for quantity, essentially on the basis of quality, cost of access (e.g., proximity), and advertising. For the most part, it is difficult to introduce price competition in these kinds of quasi-markets. To set prices at the optimal level and to get the maximum benefit for the minimum price (or cost to the government), policymakers need a great deal of information. For relatively homogenous services like prison incarceration, setting a price per prisoner is relatively simple. For educational services, a price per student is also relatively easy, though heterogeneity in the target population increases once learning disabilities, behavioral problems, ethnic and linguistic differences, and socio-economic background are factored in. In areas with relatively homogeneous services and hard budget constraints, pricing becomes more simply a matter of dividing the fixed budget by the number of beneficiaries.

In healthcare, heterogeneity is vast because the service is not per patient but per treatment, and policymakers must first establish ‘commodities’ in terms of standardized health ‘goods.’ The issue for information processing is that governments need vast amounts of information (and capacity to process it) in order to set prices for a wide range of treatments. And, especially in healthcare, central price makers need new data constantly in order to keep abreast of rapidly changing medical technologies (on Chile, see Lenz 2005).

In outsourcing contracts (and infrastructure bidding), competition obviates the need to amass information on pricing; governments fix the quantity and providers compete on price. However, once the competition is over and contracts awarded, providers have incentives to lower quality, so government regulators face similar problems, and high information costs, in monitoring the quality. And, consumers cannot exit, so that source of information is lost.

Quasi-markets thus greatly expand the quantity of information required as well as increasing the need to disseminate it widely. At a minimum, market mechanisms increase the costs of data collection, and require further institution building in the public sector as governments create entities and staff them with trained professionals who can establish reporting and testing requirements, collect and process data, and conduct regular onsite inspections. A good example is that of hospital services contracted out by state and municipal governments to not-for-profit organizations in Brazil. Supporting these contracts are very detailed reporting and supervision schemes, as well as annual consumer satisfaction surveys that partly define payment (see Quinhoes 2009). As the chapter by Vaillant et al. analyzes, lots of well-disseminated information is crucial to the functioning of educational vouchers in Chile, both in determining merit pay for teachers and in parent decisions on where to enroll their children.

Quasi-markets also introduce new asymmetries and therefore incentives to manipulate information flows. Hierarchies are of course not without information asymmetries or opportunism as subordinates often massage the flow of information going up the chain of command. However, quasimarkets can lengthen the distance between monitors and providers and add profit motives to the incentives to manipulate information, all in the context of new and more information and data that could be doctored (these perverse incentives are considered further in Sect. 4).

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