Quasi-Market Competition in Public Service Provision: User Sorting and Cream-Skimming

Quasi-markets that introduce choice and competition between public service providers are intended to improve quality and efficiency. This article demonstrates that quasi-market competition may also affect the distribution of users. First, we develop a simple theoretical framework that distinguishes between user sorting and cream-skimming as mechanisms through which quasi-markets may lead to high-ability users becoming more concentrated among one group of providers and low-ability users among a different group. Second, we empirically examine the impact of a nationwide quasi-market policy that introduced choice and activity-based budgeting into Danish public high schools. We exploit variation in the degree of competition that schools were exposed to, based on the concentration of providers within a geographical area. Using a differences-in-differences design—and register data containing the full population of students over a 9-year period (N = 207,394)—we show that the composition of students became more concentrated in terms of intake grade point average after the reform in high-competition areas relative to low-competition areas. These responses in high-competition regions appear to be driven both by changes in user sorting on the demand side and by cream-skimming behavior among public providers on the supply side.

Profit, Choice, and Competition

This chapter draws on recent empirical work and summarizes the quantitative research on the effects of privatization, for-profit firms, choice, and competition in the Swedish welfare sector. By treating the effect studies together, the chapter presents a coherent picture of the lessons learned across the major welfare areas of education, health care, and elderly care. Overall, private providers appear on average to be a bit better in terms of quality and are also more productive. Choice and competition have improved several services, most notably compulsory education and elderly care. The evidence is more mixed for education at the upper-secondary level, where students at independent schools are more likely to finish on time and continue to tertiary education, but also perform worse on externally graded tests and benefit from lenient grading. A key takeaway is that the design of regulation and quality control matters greatly for outcomes. Each welfare service brings its lessons and mechanisms for quality control of both private and public providers should be strengthened. A general observation is that the playing field is often tilted against private providers since local governments are both arbiters of quality for private providers and a competing service provider. Widespread loss-making among municipal providers suggests that municipalities often treat their own in-house providers more leniently than private providers. In education, attempts at cream-skimming have been more evident at independent schools than at municipal schools. In other services, there is no systematic evidence that private providers practice cream-skimming to the detriment of weak groups, which is also illegal.

Fintech Borrowers: Lax Screening or Cream-Skimming?

We study the personal credit market using unique individual-level data covering fintech and traditional lenders. We show that fintech lenders acquire market share by lending first to higher-risk borrowers and then to safer borrowers, and rely mainly on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than neighbor individuals with the same characteristics borrowing from traditional financial institutions. Furthermore, they tend to experience a short-lived reduction in the cost of credit, because their indebtedness increases more than non-fintech borrowers after loan origination. However, fintech lenders’ pricing strategies are likely to take this into account.

A Descriptive Analysis of Cream Skimming and Pushout in Choice versus Traditional Public Schools

One of the controversies surrounding charter schools is whether these schools may either “cream skim” high-performing students from traditional public schools or “pushout” low-achieving students or students with discipline histories, leaving traditional public schools to educate the most challenging students. In this study, we use longitudinal statewide data from Tennessee and North Carolina and linear probability models to examine whether there is evidence consistent with these selective enrollment practices. Because school choice programs managed by districts (magnet and open enrollment programs) have a similar ability to cream skim and pushout students, we also examine these outcomes for these programs. Across the various school choice programs, magnet schools have the most evidence of cream skimming, but this might be expected as they often have selective admissions. For charter schools, we do not find patterns in the data consistent with cream skimming, but we do find evidence consistent with pushout behaviors based on discipline records. Finally, some have raised concerns that students may be pushed out near accountability test dates, but our results suggest no evidence consistent with this claim.