Does competition in privatized social services work? The Chilean experience

Abstract

This paper examines the premises under which the privatization of Chilean social services of 1981 was carried out. Reformers expected that (i) competition between providers would ensure a more efficient supply of services, and (ii) shifting decisions to households would guarantee a better satisfaction of household needs. Although some of the benefits of competition are lost through rent dissipation, especially in the providers' search for the more profitable customers, we conclude that the reform has benefited society by providing competition to public providers and reducing the risk of political capture. The major lesson, however, is that the full benefits from privatization-cum-competition are slow to arrive and require able regulators. Moreover, the benefits of privatization may depend to a large extent on implementation fine tuning.