Customer Ownership and Quality Provision in Public Services Under Asymmetric Information

Abstract

The implementation of projects producing external effects is often a source of disagreement and conflict between hosting and nonhosting communities. The article focuses on the impact of participatory ownership on conflict resolution and social welfare in the presence of asymmetric information and imperfect quality monitoring. We show that in such situations the participatory solution may help solve deadlocks that money transfers to a for‐profit operator cannot solve. The analysis highlights three main factors behind this fact. First, a customer‐owned cooperative internalizes, at least partially, the external effects generated by the project. Second, the alignment of cooperative members' preferences with those of the social planner reduces (in some cases eliminates) the distortions caused by information asymmetries. Third, cooperatives require less costly monitoring than their for‐profit counterparts. We also show that cooperatives' productive inefficiency with respect to for‐profits may emerge endogenously as a consequence of a lower pressure to compete on costs for the market.

JEL Classification: H23, L33, P13