Regulation of Privatized Public Service Systems
Posted: 16 Sep 2020 Last revised: 10 Apr 2023
Date Written: August 2, 2020
To address financial shortage for public service provision, a government may delegate service provision to a private firm subject to regulation in service price or wait time, or jointly finance, own, and run a service system with the firm. While the government aims to maximize social welfare, the firm's goal is to maximize profit. We model the service system as a queueing system in which customers are heterogeneous in service valuation and sensitive to price and delay. We consider two types of interaction between the government and the firm, i.e., sequential move (when the government has commitment power) and simultaneous move (when the government's commitment power is absent). The scenario under a joint venture is modeled as an optimization problem whose objective is a mix of profit maximization and social welfare creation. We find that while wait time regulation is more efficient than price regulation when the government lacks commitment power, the relationship is reversed when having commitment power. Somewhat surprisingly, price regulation without commitment power may backfire. Furthermore, the joint venture outperforms complete privatization (in terms of maximizing welfare), thereby avoiding the possible backfire of price regulation. In some instances, the joint venture outperforms all regulation schemes even when the government takes only a small share in the project. Our work uncovers that the government's commitment power plays a critical role in choosing the regulation instrument, and the joint venture can be an efficient method to deliver public service.
Keywords: regulation, public-private partnership, service system, queueing economics
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