(De)centralized Pricing for Public Services: Evidence from Tanzania

When private providers of publicly subsidized services have superior information about production and demand conditions, effective service delivery requires redistributing rents to providers. Yet, allocating excessive resources to providers reduces the surplus available for consumers, making regulation of market power necessary. We examine optimal price-cap regulation in the context of publicly subsidized animal vaccination sales that generate private pay-offs for veterinarians in Tanzania. As part of a large-scale chicken vaccination campaign we randomly assign veterinarians to two groups in order to estimate the effect of price-cap regulation on equilibrium quantities, prices and distribution. In the control group, modelled after the status quo, veterinarians are free to independently set prices and collect payment for their vaccination services. As providers enjoy significant market power, this group measures the unregulated market outcome. In the treatment group, veterinarians’ market power is constrained by strictly enforced price-caps. We combine the estimates from the intervention and a model based on sufficient statistics in order to (i) evaluate the optimality of the imposed price-cap regime and (ii) estimate the amount of rents that have to be allocated to agents to maximize consumer surplus.