Wednesday, March 23, 2005
[IWS] OECD: Extend ROLE of PRIVATE SOCIAL EXPENDITURE? [23 March 2005]
IWS Documented News Service
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Institute for Workplace Studies
School of Industrial & Labor Relations
Cornell University
16 East 34th Street, 4th floor
New York, NY 10016
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OECD SOCIAL, EMPLOYMENT AND MIGRATION WORKING PAPERS NO. 23
SHOULD WE EXTEND THE ROLE OF PRIVATE SOCIAL EXPENDITURE? [23 March 2005]
Mark Pearson and John P. Martin*
http://www.oecd.org/dataoecd/59/22/34621653.pdf
[full-text, 38 pages]
SUMMARY
Some people make great claims about the advantages to be gained from greater reliance on the
private sector for the provision of social protection. Many of the claims for great macroeconomic
advantages do not stand up to scrutiny. However, there is some reason to hope that private provision might
promote microeconomic efficiency and services which are more responsive to consumer preferences than
those provided by a single monopoly public sector provider. Drawing on examples from recent OECD
country experiences with private health insurance, care for children and the elderly, and private pension
provision, three main conclusions can be drawn. First, opening provision to a diversity of providers has
often promoted more choice and innovation. Second, however, efficiency gains have often been limited.
This is due to a number of inter-related reasons: (a) Individualisation of packages of services is expensive.
(b) In order to ensure adequate coverage of the population, cross-subsidisation of particular groups of
people is often mandated on providers, reducing cost-competition and diversity of choice. (c) Informational
asymmetries (how good is this childcare which I cannot personally monitor, or this health care package
which I am not technically able to assess?) cannot be overcome without extensive regulation, which has the
effect of limiting innovation and competition. (d) The fiscal incentives necessary to stimulate private
provision are high, and have welfare costs of their own. Third, and related to this last point, the
distributional effects of private provision raise significant social problems. Private financing and provision
of social benefits is not a magic wand; waving it in the social protection field will not mean that the
economy and voters will be freed from some great deadweight that has been dragging them down.
Nevertheless, the private sector can sometimes deliver either a slightly cheaper, slightly more varied or
slightly more flexible system of social protection.
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