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If You Pay Peanuts...
The December 2010 Issue of the European Journal for Social Security contains a contribution entitled: “If You Pay Peanuts…”. The article presents the findings from a lab experiment with professional bidders from reintegration service providers.
The findings clearly indicate that government organisations should be careful in focusing on the service fee as the main criterion in a RFT. The experiment revealed that price competition may lead to a ‘race to the bottom’. The service fee then becomes too low. This, at the end of the day, will leave all parties worse off. Administrative price setting may be preferable, provided the government does not set the fee level too low.