The Theory and Practice of Managed Competition.

• Author: Miranda, Rowan
• Position: Statistical Data Included

Managed competition can be an effective strategy for reducing costs and improving the quality of service delivery. The author presents the theoretical foundation and empirical evidence for this concept.

The reinventing government movement has been centered on the idea that competition can and is being used by governments at all levels to change how services are being financed and delivered. While the roots of this movement can be traced back at least 200 years, the systematic practice of some of its ideas is a relatively recent phenomenon. One of the main insights of the book Reinventing Government is that public and private monopolies can both undermine government performance. As the authors of Reinventing Government acknowledge, "it is one of the enduring paradoxes of American ideology that we attack private monopolies so fervently but embrace public monopolies so warmly." [1]

Nearly 40 years ago, in a seminal article in the field of public administration, the idea of separating provision and production of public services was argued to improve the effectiveness of government:

The separation of the provision of public goods and services from their production opens the greatest possibility for redefining economic functions in a public service economy. Public control can be maintained in relation to performance criteria in the provision of services, while allowing for increasing amounts of competition to develop among the agencies that produce them. [2]

From the late 1970s through the 1980s, fiscal pressures facing governments led to major changes in service delivery strategies. The term privatization is now seen as being too one-sided. Instead, the mantra of many politicians and administrators today is competition. This article discusses the theory and empirical evidence for managed competition.

Managed competition is a service-delivery strategy that requires government agencies to periodically compete with the private sector to produce public services. The strategy implicitly recognizes that the simple and militant transfer of a service from a public monopoly to a private one is unlikely to yield improvements in either quality or cost savings. Instead, allowing in-house units of government to bid against private vendors can reduce political and labor resistance compared to full-scale privatization efforts. In theory, managed competition can result in all of the service delivered by government, all by the private sector, or a public/private mix. The key is that the service is bid at periodic intervals and the public and private sectors have an opportunity to compete. Managed competition is the hallmark of the reinvention efforts of several large cities-Indianapolis, Milwaukee, Phoenix, and Philadelphia--whose mayors and managers have received national attention for their work. The general strategy o f contracting-out (Exhibit 1), and managed competition in particular, continues to be the exception rather than the rule in service delivery.

The Logic of Managed Competition

Sound theory guides practice. In this case, theory supports a powerful logic as to why managed competition merits consideration by finance officers focused on balancing budgets.

For several decades, scholars and practitioners examined the question, "Is the private sector more efficient than the public sector?" A more recent focus is less on an all-or-nothing proposition and instead asks, "What are the conditions under which competition can reduce costs and improve quality?" A significant amount of research effort has been dedicated to two areas: 1) developing models to determine causal relationships between factors that influence government performance, and 2) data collection for studies that compare the performance of public and private agencies delivering the same services. A synthesis of both of these areas of research is provided below.

Models of Government Performance

Theories for explaining the relative performance of the public- and private-sector organizations fall into two main categories: property rights and public choice. The foregoing discussion highly simplifies the models in the literature but it serves the basis of better understanding the logic of managed competition. More extensive reviews of the literature, however, are available. [3]

Property Rights Approach. The property rights approach is associated with the work of several economists including Nobel Laureate Ronald Coase. This approach states that the most important difference between public and private organizations, from the standpoint of comparing their performance, is the nature of ownership. The common (indivisible) ownership characteristic of public organizations is argued to increase inefficiency and, therefore, the assignment of property...