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.