Public strongSectorstrong Rationing and strongPrivate Sectorstrong Selection.pdfVIP

Public Sector Rationing and Private Sector Selection Simona Grassi Ching-to Albert Ma Departamento de Economía Department of Economics Universidad Carlos III de Madrid Boston University Calle Madrid, 126 270 Bay State Road 28903 Getafe (Madrid) Boston, MA 02215 España USA sgrassi@eco.uc3m.es ma@bu.edu Incomplete, preliminary. Do not quote, cite, or circulate. June 2008 Acknowledgement: We thank seminar participants at Boston University, Carlos III University in Madrid, Harvard University, the Health Economic Policy conference in Crans Montana, Switzerland, 9th European Health Economics Workshop in Bergen for their comments and suggestions. The first author thanks the Italian Fulbright Foundation for financial support. Abstract We study the interaction between a public sector and a private sector in the provision of a private good. The public sector has a limited budget. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two information regimes: first, the public supplier observes only wealth information; second, the public supplier observes both wealth and cost information. The public supplier chooses a rationing policy based on its information; simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing