Reducing the quality risk of elderly care services in government procurement from market-oriented private providers through ex ante policy design: lessons from the principal-agent theory analysis

BACKGROUND: Government procurement of elderly care services from market-oriented private providers has become an important way to respond to the growing demands of elderly care. However, the government cannot accurately identify the actual quality efforts of these providers, and the government pursues social benefits while the providers pursue economic interests. The existence of asymmetric information and goal divergence increases the quality risk of services. From the perspective of maximizing the government’s net benefits, this study aimed to analyze how to reduce the quality risk through ex ante policy design. METHODS: On the basis of the principal-agent theory, this study defined the asymmetric information of market-oriented private providers’ efforts on quality as a random variable, and constructed the theoretical model in the case of asymmetric information to compare with the one in the reference case of complete information, in both of which the government is the principal and market-oriented private providers are the agents. And the models also introduced several parameters to describe key factors that affect the contract results, including the physical health of the elderly, the spillover benefits to the government and market-oriented private providers, and the market risks. RESULTS: The optimal results of the models in the two cases were obtained respectively, and the validity of the theoretical models was verified in a numerical example. Taking the case of complete information as the basic frame of reference, the difference of the optimal results in both cases showed the extent of negative impacts of asymmetric information, and highlighted the role of ex ante policy design in minimizing asymmetric information and reducing its negative impacts. Some ex ante policies that can improve the supervision of market-oriented private providers and their quality efforts, as well as have positive effects on key factors, were also recommended. CONCLUSIONS: The government should attach importance to ex ante policy design to reduce the quality risk of elderly care services supplied by market-oriented private providers in government procurement. Our study provides main framework and critical directions for ex ante policy design, which is conducive to the realization of real and sustained quality improvement.