Nobel prize highlights folly of privatising public services

The Nobel prize in economics has been given to Oliver Hart and Bengt Holmstrom for their work on contract theory. Oliver Hart has specialised in ‘incomplete contracts’, i.e. a contract to deliver a service can’t clearly specify how this should be done. This is important because there are two, conflicting forces at work when a government considers privatising a public service like the NHS: reduction of costs versus improvements in quality. “Hart’s work shows that if the government’s main priority is to improve quality it should retain control, since private providers usually have too strong an incentive to cut costs. This can result in an unacceptable drop in quality.”
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