Oversight and Competition with Heterogeneous Service Providers: The Federal Lifeline Program

Abstract

Many government benefits and services are provided through private markets. Firms compete to provide services directly to individuals, and the most productive firms survive and serve the market. However, insufficient enforcement of program rules weakens competitive pressures, allowing less productive firms to maintain market share. Exploiting two features of the Lifeline phone subsidy program, state-level variation in regulatory environments and a one-time reform, I test how oversight influences the behavior of heterogeneous firms. Lower productivity firms select into loose-oversight markets, driving the large state-level differences in wasteful program spending. Similar forces may factor into healthcare, education, and consumer finance markets.