6.5 Conclusion
Government is involved in wide range of contracting for services, from services supplied to government itself to services that government purchases on behalf of the community. A traditional approach to the economic analysis of this type of contracting would have emphasized transaction costs and standard cost-saving versus quality tradeoffs. An incomplete contracts approach provides a different perspective by focusing on these arrangements as allocations of residual decision rights in the customer relationship, and as a mechanism by which to ensure that those rights sit with parties that add the most value to the relationship. This literature may potentially be applied to the public sector in a variety of ways. For example:
- The importance of the relationship between general practitioners (GPs) and their patients provides an explanation for the fact that GPs are the part of the health sector that in almost every country is privatised. Since the GPs' investment in human capital and patient-specific knowledge will both be the key to delivering the best services to patients, government ownership (as opposed to just funding) of the general practice may reduce efficiency.[31] By comparison with GPs, it is not clear that hospitals have long-term customers or customer-specific knowledge to the same extent, which might explain why public hospitals do not “own” the ongoing relationship with their patients.
- Community-based lending programmes (such as microfinance) may be effective in using relationships and moral suasion within communities to replace high cost monitoring and enforcement mechanisms used by loan companies and loan sharks.
- Whānau Ora and other community-based initiatives can perhaps be seen as about providing a community organisation with ownership of the relationship with the client/patient. The more specific the knowledge that the community organisation might have in relation to the provision of service to the patient, the more important that it is the community organisation that owns this.
The value of these types of relationships is reinforced by the literature on “arms-length delegation” of public activities, which demonstrates that a range of problems created by contractual incompleteness may be addressed or ameliorated where the government delegates service provision or other decision-making to a third party.
Notes
- [31]This comment should not be taken to imply that there is no room for improvement in the current arrangements for delivery of primary health care in New Zealand. For example, there may be ways in which efficiency could be improved by considering more carefully the incentives that are provided for GPs by the way in which government payments to them are structured. However, it does suggest that any move away from GP ownership of the patient relationship would need to take account of the potential reduction of the incentives for GPs to invest in that relationship, and the implications of that for the quality of care provided, as a cost to be balanced against the benefits that any alternative structure might provide.
