„The Selection Principle and Market Failure in Systems Competition“

Hans-Werner Sinn

Journal of Public Economics 66, 1997, pp. 247-274; CESifo Working Paper No. 103, 1996; NBER Working Paper No. 5411, March 1999.


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