Public Sector Rationing and Private Sector Selection

Simona Grassi () and Ching-to Albert Ma ()
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Simona Grassi: European University Institute, Max Weber Programme

No wp2009-a, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We study the interaction between a public sector and a private sector in the provision of a private good. Under a limited budget, the public supplier uses a rationing policy. A private ?rm may supply the good to those consumers who are rationed by the public system. Consumers have di¤erent amounts of wealth, and costs of providing the good to them vary. We consider two information regimes: First, the public supplier observes only wealth information; second, the public supplier observes both wealth and cost information. The public supplier chooses a rationing policy based on its information; simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing policy. In the first information regime, there is a continuum of equilibria; in each, rich consumers are rationed, and the private firm sells to these rationed consumers at high prices. In the second regime, there is a unique equilibrium. The public supplier allocates the good to consumers according to a cost-e¤ectiveness rule. In the equilibrium, rationed consumers have high costs relative to the bene?t, and the rationing rule is the same as if the private market were inactive.

New Economics Papers: this item is included in nep-pbe
Date: 2009-01
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