Kornai’s Behavioral and Institutional Insights about the Role of the State: Theory and Application to the Health Sector in China, India, and the US

Karen Eggleston

Keywords: 3. The role of the state and the new spirit of capitalism(s) (keynote: Amartya Sen, area chair Mihaly Laki, May 16 morning)

Abstract: Providing citizens with effective and resilient health services, and other services such as education, often entails government financing and private provision or other forms of public–private collaboration. Governance arrangements must confront a range of ethical challenges, including assuring social solidarity while promoting individual sovereignty and choice (Kornai and Eggleston 2001). Drawing on Kornai’s insights regarding the behavioral and institutional mechanisms underpinning such pervasive phenomena as the soft budget constraint and limited innovation under public ownership, this paper explores the theory of the “proper scope of government” (Hart, Shleifer, and Vishny 1997) in the health sector compared to education, when the continuum of publicly-funded services includes those with large ex ante relationship-specific investments as well as services with substantial scope for ex post aggrievement and quality shading (Hart and Moore 2008, Hart 2009). We summarize a range of stylized facts consistent with the theory (Eggleston 2023), focusing on the three most populace economies – China, India, and the US – and discuss the enduring legacy of Kornai’s intellectual contributions for understanding local public goods “islands of shortage” within market-based economies.