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

Rethinking the selfare state 28
among the most desirable features of an ideal supply market. In such industries, where
sunk costs are lower and demands are more idiosyncratic (some parents want trade
schools, other prefer to see their children receive a liberal arts education; some would
value a religious education for their child, while others might prefer a strictly secular
one), it makes considerable sense to have many providers competing within a market.
The high degree of contractual flexibility available to suppliers under a voucher scheme
(since suppliers do not need to guarantee anything ex ante before bringing their product
to market) allows providers to offer any service which they think is likely to sell on the
market, subject to whatever limited government regulations are deemed appropriate and
necessary.
Where innovation and variety are desirable, it follows that principals are best disposed
to make their own choices, since they are usually best informed about their preferences.
Voucher schemes eliminate the need for governments to contract for consumers by
proxy: the consumers act as their own agent when “negotiating” with providers. In the
actual contracting, market forces align the interests of the principal (consumer) and agent
(provider): principals have an interest in purchasing a service that meets their
preferences; and agents have a direct interest in providing a service that principals will
want to purchase. Principals, since they are now responsible for any costs exceeding the
value of the voucher, need to make cost-effective decisions, while agents have an interest
in minimizing costs in order to maximize residuals. In principle, then, the “bargainingchip”
of ownership discussed in the case of supply-side subsidies is effectively balanced
by the “bargaining-chip” of the consumer’s dollar-votes. Thus, the contractual interests of
principals and agents tend towards closer alignment.
Even in uncontracted-for circumstances, a number of mechanisms exist to reconcile
those interests. First and most obviously, since the providers are private firms, the
mechanisms of accountability discussed with respect to supply-side subsidies (such as the
market for managers, the threat of being “wound-up,” and the use of residual claims as
incentives for productivity and innovation) will also be operative in the case of demandside
subsidies. As in the case of supply-side subsidies, the ownership effect is operative,
and tends to produce more efficient and cost-effective delivery.
Poor service delivery in uncontracted-for scenarios, in addition to dissuading a
particular customer from returning, may also damage a provider’s reputation in the
market at large. Marginal cost cuts after contracting which have an impact on quality are
also contraindicated for much the same reason. The need for suppliers to compete for
market share (i.e. for loyal customers) creates an incentive for them to favour a costquality
trade-off which more closely matches the interests of existing and prospective
consumers. At the same time, providers are free to modify, innovate and invent new
services as long as they anticipate demand for them, and there is the possibility for a
competitive market on the basis of new consumer-oriented service innovations (the
competition effect).
This is not to say that principal-agent problems cannot arise under voucher schemes.
In the case of monopolies, principal-agent problems will be as preponderant as ever
(although as was just discussed, voucher schemes are a poor choice in situations where
monopolies are likely to arise). Furthermore, the problem of information failures
(contingencies wherein consumers lack sufficient information to make decisions which
are in their own best interests) may be significant, and providers who are able to