COMPETITIVE PROVISION OF QUALITY.

Abstract

The public firm or private firm can provide competition in a market. In this paper, the firms can only compete on quality. The government designed a procurement mechanism and incentivised the firms because of the adverse selection problem. The quality provided by the firms is unobservable, so there is a moral hazard problem. Due to the moral hazard problem, the firms can always get an excess surplus. An optimal auction mechanism can be designed by the government to extract the excess surplus. We are interested to see whether the involvement of the public firm in the market gives us the best way to provide services.