THE SELECTION PRINCIPLE AND MARKET FAILURE IN SYSTEMS COMPETITION

If governments stepped in where markets failed, reintroducing markets through the backdoor of systems competition will again result in marl: et failure. Three models are presented which illustrate this wisdom. T he first is concerned with congestion-prone public goods and shows tha t fiscal competition may be ruinous for the governments. The second co nsiders the insurance function of redistributive taxation and shows th at systems competition may suffer from adverse selection. The third st udies the role of quality regulation and shows that systems competitio n may be a competition of laxity resulting in inefficiently low qualit y standards. (C) 1997 Elsevier Science S.A.