Customer Ownership and Quality Provision in Public Services under Asymmetric Information

The implementation of projects producing external effects is often a source of disagreement and conflict between hosting and non-hosting communities. The paper focuses on the impact of participatory ownership on conflict resolution and social welfare in the presence of asymmetric information and imperfect quality monitoring. We show that in such situations the participatory solution may help solve deadlocks that money transfers to a for-profit operator cannot solve. The analysis highlights\r\nthree main factors behind this fact. First, a customer-owned cooperative\r\ninternalizes, at least partially, the external effects generated by the\r\nproject. Second, the alignment of cooperative members' preferences with\r\nthose of the social planner reduces (in some cases eliminates) the distortions caused by information asymmetries. Third, cooperatives require less costly monitoring than their for-profit counterparts. We also show that cooperatives' productive inefficiency with respect to for-profits may emerge\r\nendogenously as a consequence of their lower pressure to compete on costs\r\nfor the market.