The Selection Principle and Market Failure in Systems Competition

Hans-Werner Sinn

Journal of Public Economics 66, 1997, S. 247-274, CES Working Paper Nr. 103, Januar 1996, NBER Working Paper Nr. 5411, Januar 1996, NBER Reprint Nr. 2199, 1997, Aufsatz für die Tagung des Finanzwissenschaftlichen Ausschusses des Vereins für Socialpolitik in Hamburg vom 29. bis 31. Mai 1996, Februar 1996.


lf govemments stepped in where markets failed, reintroducing markets through the backdoor of systems competition will again result in market failure. Three models are presented which illustrate this wisdom. The first is concemed with congestion-prone public goods and shows that fiscal competition may be ruinous for the govemments. The second considers the insurance function of redistributive taxation and shows that systems competition may suffer from adverse selection. The third studies the role of quality regulation and shows that systems competition may be a competition of laxity resulting in inefficiently low quality standards.


Systems competition; Market failure; Fiscal competition

JEL classification

H20; H70