Rethinking the Welfare State: The prospects for ... - e-Library

Rethinking the selfare state 22
of providers (agents) and consumers (principals). It is not that public accountability and
private accountability are equivalent, but rather that they present similar challenges when
considered from the point of view of principals and agents with both conflicting and
congruent interests.
Using the perspective of contractual problems elaborated above, we propose to
compare the range of modes of service provision, from pure public provision to tax-andtransfer
schemes. It will become apparent that each of these modes will produce different
“trade-offs” between the various areas of contractual difficulty. For instance, supply-side
subsidies in the form of “contracting out” of services formerly provided directly by the
state will be expected to lower agency costs in virtue of the effect of market forces on
management behaviour; however, it can be expected to exacerbate certain principal-agent
problems, as the interests of the consumer (high-quality services) and the producer (the
accumulation of residuals) may be radically divergent. Tied demand-side subsidies
represent the preferable alternative in many situations, because of their potential to
reconcile the interests of principals and agents, provide strong incentives for efficient
delivery and consumption, and reduce the incidence of certain forms of moral hazard.
Our analysis will also reveal potential contract problems endemic to voucher
arrangements, and discuss possible remedies.
The four principal modes of social service delivery: a critical
comparison
Purely public provision
The contractual arrangements which undergird purely public provision are rather
complex. Since the government arranges for the provision of services and contracts for
them on the behalf of its citizen-consumers, it takes on the role of agent with respect to
them as principals. At the same time, however, it is also the principal in another
relationship: its contract with the agency, employees or union which will actually be
providing the service, who acts as its agent in the transaction.
In situations where the services are provided by an agency which is a department of
the same government which is purchasing the service, the state is effectively contracting
with itself. 28 This represents a trivial solution to one set of principalagent problems: if the
government is both the principal and the agent, the interests of both will always be
coterminous. On the other hand, the interests of the consumer-as-principal (which are
paramount) and government-as-agent can still diverge, sometimes radically. From the
perspective of incomplete contracts, a major drawback of public provision is its inability
to provide contractual incentives which can reconcile the latter set of interests.
In the first place, a primary mode of contracting between governments and agents
takes the form of employment contracts with civil servants—often collective agreements
with public sector workers—contracts which can stipulate inputs (e.g. in the case of
public school teachers: salary, hours, duties and basic standards, etc.) but which cannot
assure outputs (e.g. quality of teaching, efficient use of time, involvement in
extracurricular activities, etc.). Such contracts can often be of fairly long duration, and
may not provide adequate mechanisms for disciplining unsatisfactory performance.