Competition, fee-for-service requirements, and government performance: evidence on the Federal Reserve

Abstract

This paper examines the impact of competition and fee-for-service requirements on the efficiency and quality of government services. Using internal cost and quality data on the United States Federal Reserve, I find that fee-for-service requirements alone were not enough to motivate performance improvements. Costs went down only in the single Fed service (forward check-clearing) that also faced vigorous product-market competition, and the extent of the cost reductions was greater in more competitive markets. Importantly, the cost reductions in check-clearing were accompanied by quality improvements, with service quality positively associated with contemporaneous and subsequent costs. These results are consistent with studies on the private sector that indicate that quality improvements can increase productivity and reduce costs. Taken together, the evidence points to competition as a potential tool in the nation’s efforts to improve the performance of government services.