What Drives For-Profit and Nonprofit Organizations’ Entry into Voucher Markets?

Abstract

This study investigates a social service voucher program in Korea to examine why local governments rely on external actors, such as for-profit and nonprofit organizations, in provisioning social services and what encourages such market entry in view of the transaction cost theory. The social service voucher program, first introduced in 2007, offers a unique dataset of 1,101 local markets to examine how local governments are willing to stay in control of provisioning the nationwide program while promoting private actor entry. This study finds that local governments with lower fiscal capacities or in markets in which multiple existing organizations operate are more motivated to foster for-profit entry, whereas only existing nonprofit organizations in the market that provide the same services predict nonprofit entry. The implication is that the facilitation of for-profit entry is associated with local governments’ need to manage transaction costs, although this may not be true for nonprofit entry.

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