Cube = market rules

PUBLIC MARKETS
Innovation or oxymoron?

Blob = life

1. Competition drives innovation in 4. Questions for discussion

private markets - this is good

Can the government use market principles to drive innovation in its services?

2. How do you create a

public market?

3.

Lets think about health and education

INNOVATION
Innovation in the private market
John Kay - British Economist

INNOVATION
Markets, natural selection and evolution
The Adaptive Markets Hypothesis:
Learning by receiving positive and negative feedback Fear and greed are adaptive traits that enhance the probability of survival Efficiency is context-dependent and dynamic Survival of the richest Andrew Lo (MIT)

INNOVATION
Innovation economics the definitive Wikipedia summary
There is an economic doctrine called innovation economics Stems from 1940s Schumpeter, but has kicked on in the last 15 years Central tenet is that economic growth is driven by innovation BUT.... Government should NOT leave innovation to the market alone Spurring evolving and learning institutions is the key to growth

PUBLICMARKET
How do you create a public market?
1 Create a private market demand side response vouchers choice and exit profits
Stretch the blob

2 Align incentives supply side response build on social norms align incentives competition on quality?

Adjust the cube

PUBLICMARKET
Social norms are more powerful than you think

Why did I spend a chunk of my weekend working on this presentation?

Research has shown that we make a lot of our decisions to fit in with the crowd it is a more important motivator than other more rational reasons. This is especially true when there is uncertainty we look to see what the person next to us is doing. And we dont tend to recognise that we are doing it.

EXAMPLES
Example 1 - Health (creating a private market)
Compulsory competitive insurance
Government pays insurers a risk adjusted amount per subscriber Government regulates insurers & providers 1. 2.

Government

3. 4. 5.

Insurers offer packages to patients Patients choose insurers and enter contracts Patient may pay for additional cover Insurers cannot turn patients away

7. 8.

Insurers pay providers Insurers/providers may enter into contracts

Insurers

6.

Health providers

Patients

EXAMPLES
Example 1 - Health continued
Compulsory competitive insurance

Purchaser competition Insurers have an incentive for: Responsiveness to consumers (to attract members) Efficiency (to reduce costs and maximise earnings) Prevention (to save on member payouts)
$ $ $

Provider competition
Incentives for: Responsiveness to consumer needs Efficiency Prevention programs

Valued by insurer

EXAMPLES
Example 2 Education: (Aligning incentives)

A model to promote innovation and dynamic improvements in schools

1. 2. 3.

Publish teacher ratings NOT linked to pay

No choice for parents between schools

No ranking between schools (and funding not linked to performance)

Assumes all players at the individual school level have the same motivation good education for the kids Intended outcomes:

Teachers striving to be recognised as good

Parents agitating for improvements

No perverse funding outcomes ie $$ going to good (or bad) schools

QUESTIONS
Discussion questions

Whats wrong with the school model I just outlined?

Can you think of ways to align incentives without prices in other areas of government activity? Can you protect equity objectives through strong regulation under voucher models in an area like health, or is it too great a risk?