Regulation of Privatized Public Service Systems

Abstract

To alleviate the financial shortage for public service provision, a government agency may jointly finance, own, and run a service system with a private firm (in the manner of a joint venture) or delegate service provision to the firm subject to regulation in service price or wait time. We model the service system as a queueing system in which customers are heterogeneous in service valuation and sensitive to price and delay. While the government aims to maximize social welfare, the firm’s goal is to maximize profit. Hence, the joint venture has the objective of a mix of profit maximization and social welfare creation. Under the regulation, two types of interaction between the government and the firm, that is, sequential move (in the absence of the government’s myopic adjustment) and simultaneous move (in the presence of myopic adjustment), are considered. We find that while wait time regulation is more efficient than price regulation in the presence of myopic adjustment, the relationship is reversed in the absence of myopic adjustment. Somewhat surprisingly, price regulation with myopic adjustment may backfire. However, in some instances, the government must take a large share in a joint venture to achieve the same performance under price regulation without myopic adjustment. Our work uncovers whether the government adopts myopic adjustment plays a critical role in choosing the regulation instrument.