While competition and consumer choice strengthen incentives for efficiency and possibly limit the ability to skimp on quality, they raise equity (adverse selection) concerns. When payment follows consumers, as in voucher programs (equity is rarely an issue in contract competition), then various mechanisms—both discrimination by providers and self-sorting by families—tend to sort consumers by class or socio-economic status (Betts 2005; Delbono and Lanzi 2012). Notably in schemes that pay a flat price per person serviced, suppliers have incentives to discriminate against those with greater difficulty to learn (in schools), with poorer health (in hospitals), or that pose a greater risk (in insurance schemes). Consumers will also try to select, avoiding schools with poor students or insurers that take more risky participants, tending to cluster with similar class peers.
Critics of quasi-markets often argue that poor people are least able to take advantage of complex markets (see, e.g., Carnoy 1998, 311). Choice in education and healthcare is meant to benefit consumers who can leave low-quality providers and move to better ones. However, making such choices requires lots of costly information, time to evaluate it, and the ability to make costly moves (e.g., sending students to a school farther away). Moreover, market reforms sometimes allow providers to refuse service, giving them incentives for adverse selection—selecting only patients and pupils who are easy to treat—and the poor are likely to suffer disproportionately from adverse selection. In quasi-markets in Chile, private schools and private health insurers were allowed to turn students and patients away (Mora 2007). Even where private providers are legally required to accept any applicant, they can find informal means of discriminating. Anecdotes are common of administrators of richer schools making poor families feel uncomfortable and suggesting that their children might suffer socially because of their clothes or lack of cultural capital (Veleda 2006).
Advocates of vouchers in education argue that, even if poor families do not exercise choice, competition generates improvements even in the worst schools (Betts and Loveless 2005). This effect is more likely to be obtained where there are fewer barriers to exit for underperforming schools which, in effect, force passive families to opt for better schools. However, critics note that this process is often protracted and that political barriers to closing local schools are enormous. And, if low-quality schools are kept open and the better students leave, then performance is likely to fall even further due to a negative or absent ‘peer effect.’
Reforms thus often include explicit corrective or compensatory policies to favor the poor and enhance equity, such as increasing subsidies for services offered to poor families or in poor areas. In Sweden, and more recently Chile, for example, governments pay schools more (increase the value of the voucher) for students from poorer families. Whether or not such compensatory policies effectively redress inequalities introduced by quasi-markets, they certainly add another layer of complexity and need for more information and closer monitoring.22