Public Sector Rationing and Private Sector Selection, forthcoming, Journal of Public Economic Theory

thanks the Italian Fulbright Foundation for financial support. 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 policy. In the first information regime, there is a continuum of equilibria; in each, rich consumers are rationed, and the private firm sells to these rationed consumers at high prices. In the second regime, there is a unique equilibrium. The public supplier allocates the good to consumers according to a cost-effectiveness rule. Rationed consumers have high costs relative to the benefit. The private firm sells to wealthy rationed consumers at high prices. 1