Regulation of Privatized Public Service Systems

49 Pages Posted: 16 Sep 2020 Last revised: 11 Oct 2021

See all articles by Ming Hu

Ming Hu

University of Toronto - Rotman School of Management

Weixiang Huang

South China University of Technology

Chunhui Liu

affiliation not provided to SSRN

Wenhui Zhou

South China University of Technology

Date Written: August 2, 2020

Abstract

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. However, the conflict between the government's and firm's objective may lead such public-private partnership to low efficiency or even unappealing consequences. Exploring the interaction between the government and firm under different scenarios thus help identify and understand which scheme can be the best for service provision. We model the service system as an unobservable M/M/1 queue. The interaction between the government and firm under regulation is modeled as a game. We consider two practically motivated regulation instruments, i.e., price and wait time, and two types of interaction, i.e., sequential move (when the government has commitment power) and simultaneous move (when the government's commitment power is absent). The scenario under joint venture is modeled as an optimization problem whose objective is a mix of profit maximization and social welfare creation. 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, joint venture outperforms complete privatization (in terms of maximizing welfare), thereby avoiding the possible backfire of price regulation. In some instances, 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. Joint venture can be an efficient method to deliver public service, especially when the private system is very congested.

Keywords: regulation, public-private partnership, service system, queueing economics

Suggested Citation

Hu, Ming and Huang, Weixiang and Liu, Chunhui and Zhou, Wenhui, Regulation of Privatized Public Service Systems (August 2, 2020). Available at SSRN: https://ssrn.com/abstract=3665525 or http://dx.doi.org/10.2139/ssrn.3665525

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Weixiang Huang

South China University of Technology

Wushan
Guangzhou, AR Guangdong 510640
China
510640 (Fax)

Chunhui Liu

affiliation not provided to SSRN

Wenhui Zhou (Contact Author)

South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

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