To increase profits, producers will strive to lower costs, and this holds for markets as well as quasi-markets. On markets, the last consumer’s marginal willingness to pay equals the price and the marginal costs of production. In the long run, prices will approach the lowest possible average cost, and firms will break even (and make no economic profit).⁷ If some consumers’ willingness to pay exceeds the market price, there will be a consumer surplus (defined as the difference between the consumer’s willingness to pay and the price). If a lower cost of production is associated with lower quality, the market may become segmented into expensive, high-quality products and cheap, low-quality products. Similarly, if consumers are heterogeneous in their preferences for a specific product, the market may also become segmented.

In the Swedish school voucher system, revenues depend on the politically determined voucher size. Parents do not pay fees, but pay for schools by paying taxes. Thus, in the case of quasi-markets, the consumer surplus equals all consumers’ willingness to pay.⁸ That has two implications.

First, lower costs will increase profits (assuming that the voucher is constant), but no counter force will turn profits into consumer surplus. In situations when the profit motive leads to a more efficient use of resources, the resulting value is collected by the provider as profits and not passed on to consumers (or to tax-payers).

Second, there are no prices that act as quality signals to consumers, who thus risk choosing schools where costs have been lowered at the expense of quality to increase profits. Providers who wish to compete in the quality dimension must find other ways to signal quality to consumers. Because it is hard to distinguish “true” signals of quality from others, in a quasi market there is a risk of competition in marketing, rather than quality.

When revenue per student is fixed, a profit-maximizing provider will want to attract low-cost students and avoid high-cost students, i.e. engage in so-called cream-skimming (cf. Epple & Romano 2008). If independent schools engage in cream skimming, the voucher system will lead to increased segregation between schools as a (plausibly) unintended consequence.

The risk of cream skimming was a part of the debate regarding the reform (see, e.g., Troedsson 1990), and independent schools are not allowed to admit students based on academic ability or socio-economic background. Nevertheless, to engage in cream skimming, independent schools can choose to locate in socio-economically strong areas and also use waiting lists (which will have a cream-skimming effect if parents with better socio-economic backgrounds are more prone to put their children on the waiting list). Descriptive evidence (Skolverket 2024; SOU 2019:40), as well as more detailed studies (Böhlmark et al. 2016; Brandén & Bygren 2022), suggest that cream skimming is taking place.⁹

In terms of a standard market failure, one may think of choice externalities. In traditional markets, when some consumers choose actively and put more effort into evaluating available options, there are positive spillovers/externalities on passive consumers: These will also benefit from higher quality when critical consumers force producers to improve quality. On quasi markets, users who choose actively do not necessarily confer positive externalities on passive users. In the presence of peer effects and cream-skimming, negative choice-externalities may dominate.

Because schools have capacity constraints, a voucher system requires a mechanism that allocates students to schools based on their preferences, also when some schools are in excess demand. Without the price mechanism in action, the design of such algorithms is a non-trivial problem. In particular, parents may try to game the system by providing false preferences over available schools (to maximize their actual or perceived chances of being allocated to their most preferred school). The relevance of these concerns was demonstrated on US data by Fack et al., (2019) and confirmed using Swedish school choice data by Andersson et al., (2024).

When information on school quality is unevenly distributed, well-informed parents will have an advantage, benefiting students from strong socioeconomic backgrounds. Thus, when voucher schools use school-specific waiting lists, it can be seen as a way to engage in cream-skimming. Even in the absence of grade inflation (see below), providing information about school quality is difficult because such measures should ideally be conditioned on students’ socio-economic background, thus providing some school-level measure of value added. As noted by Elert & Henrekson (2024), the site provided by The Swedish National Agency for Education (Skolverket) to facilitate the comparison of schools does not contain such information, even though such measures are publicly available from Skolverket.¹⁰ It bears noting, however, that value-added measures are contested due to their implicit assumptions, methodological sensitivity, and endogeneity (Amrein-Beardsley & Holloway 2019; Goldhaber et al. 2013; Manzi et al. 2014). In practice, there is a risk that even comparatively well-informed parents will rely on information that reinforces existing aggregate perceptions and prejudices.

Information is unevenly distributed among students/parents and schools market themselves by emphasizing tangible features that are quickly communicated. Such marketing results in noise that makes it more challenging to evaluate the quality of schools. Schools with poorer quality then have higher incentives to contribute to such noise. Empirically, marketing efforts include cheap merchandise such as sweets, pens, and reflector tags, but also, for example, opportunities to win portable music players (Arreman & Holm 2011). According to Greaves et al. (2023), schools’ marketing activities rarely involve substantive curricular change.

Grades are one of the observable and quantifiable dimensions in which the output of different providers can be easily compared. In Sweden, grades from secondary education are effectively a currency to get into university (and, to a lesser extent, for getting a job). The demand for high grades from students and parents (rather than grades that accurately reflect attained knowledge) creates incentives for lenient grading. Unless there are counteracting forces, grade inflation may result, as documented empirically in Sweden in several studies (Edmark & Persson 2021; Wikström & Wikström 2005). Similarly, Hinnerich & Vlachos (2017) have shown that independent schools are more generous than municipal schools in their internal test grading, especially among students at academic programs. An evaluation from the Swedish National Agency for Education (Skolverket) finds that finishing grades from secondary schools are slightly higher for students from independent schools compared to public ones, while the frequency of high school graduation three years later is very similar. This suggests some small degree of grade inflation, controlling for observable differences such as gender, choice of high school program, and parents’ level of education (Skolverket 2022a).

In 1994, the relative grading system was replaced with a goal-related grading system, and since 2011, grades are set according to a six-point grade scale from A to F. In the words of Henrekson & Wennström (2019) the grading criteria are “entirely subjective and open to interpretation” (p. 22). The interaction between the school voucher quasi-market and the change in grading system seems thus to have exacerbated grade inflation.

Interestingly, regardless of the quasi-market setting, grades act as a currency for high school students applying to university programs, as higher grades translate into increased freedom of choice and less competitive pressure from other students. This dynamic is potentially increased not only by unintended consequences in the quasi-market but also by the fact that higher education in Sweden is state-funded and free for students. Given this context, grade inflation is not necessarily undesirable for students or parents in the short term, giving them further incentives to demand high grades from teachers and secondary schools.

In response to competitive pressure, firms in a market often try to differentiate their product from others to create their own niche in the market. In the school voucher quasi-market where central aspects of quality are safeguarded by regulation and when quality is difficult to define and measure, regulation and control will play a crucial part in quality assurance. Thus, the scope for product variation is limited and tilted toward less regulated aspects of education. Consequently, it is not uncommon to see differentiation through offers of free laptops for students, training for driver’s licenses included in the curriculum journeys abroad as part of the school semester or “free Wednesdays” (Kristiansson 2007; Pihl 2021).

In a quasi-market like the Swedish school voucher system, public and private providers compete with each other but are also subject to partially different regulations. Public schools are subject to the Principle of availability of public documents (Offentlighetsprincipen, aka the publicity principle), according to which all of their documentation, including grades, can be made public on request. Private providers are not subject to the same regulations. Requiring independent schools to obey the publicity principle would likely inhibit innovation incentives among private providers (who prefer to keep business secrets non-public), but the lack of transparency results in skewed competition in the quasi-market. As noted above, the asymmetry in information also affects students’ and parents’ possibilities to make informed decisions.

In 2021, a government inquiry was initiated to investigate how to ensure sufficient information transparency from private providers in the Swedish school voucher system. The results presented in 2024 suggest that private school providers should be included in the Principle of availability of public documents, or that they should be subject to a specific transparency regulation for private schools (SOU 2024:28).

Since reimbursement per student is fixed in the Swedish school voucher system, revenues will rise linearly with the number of students. Because economies of scale cause costs per student to fall, larger providers will have an advantage over smaller and the market will tend towards groups with a dominant position. In Sweden, the 1997 increase of the voucher from 85% to 100% was followed by a 10-year period with a substantial expansion of schools owned and run by for-profit groups (Lundahl 2024).

For independent schools in general, the average number of students per school is smaller than that of municipal schools, and the vast majority of providers are small and only run a single school. But schools run by for-profit groups as limited liability firms are on average larger than municipal schools. The International English School is Sweden’s fourth largest primary school principal in terms of number of students, after the three largest municipalities of Stockholm, Gothenburg and Malmö. Summarizing the state of the market, The Swedish National Agency for Education (Skolverket 2024) noted that the trend points towards an increased concentration of ownership within the independent school sector, as the largest actors become increasingly larger. To our knowledge, the Swedish Competition Authority has never investigated the Swedish school voucher system.

The previous three categories describe issues that arise in a given and static quasi-market structure. There are also issues related to changes in market structure, and we will focus on two categories: structural change and rent-seeking.

The ways in which quasi-markets differ from traditional markets may affect both the incentives and scope for innovation and entrepreneurship. In the case of the Swedish school voucher quasi market, both price and many quality aspects are regulated.

The fixed voucher remuneration per student means that there are no incentives to capture market shares by lowering the price of education. However, there are incentives to improve quality to attract more students. If the competitive pressure is weak, for example because of transaction costs or a (perceived) lack of alternatives, economic incentives to increase efficiency are tilted towards unconditionally extracting larger profits. As long as some quality dimensions are not regulated, providers may prioritize profit over quality. Suppose students do not “vote with their feet” and avoid schools with inferior quality. In that case, low-quality schools may continue to operate as long as a regulatory authority does not shut them down.

These schools become the equivalent of a zombie firm in traditional markets, i.e. a firm survives only as a result of fiscal or monetary stimulus (Caballero et al. 2008). For this reason, it is important to safeguard both barriers to entry and mechanisms for exit in a quasi-market setting. To achieve this, restrictions and regulations on quality measures must be enforceable. Otherwise, these restrictions limit the positive aspects of a market setting, without upholding the intended ambition of a quasi-market setting.

The consequences of detailed regulation create a challenge for quasi-market design: On the one hand, restrictions and regulations aimed at the provision of education have to be detailed enough to safeguard quality in an enforceable way. On the other hand, when regulation is highly detailed, the scope of experimentation and innovation in the provision of education is limited and skewed towards the more peripheral parts of the service, such as marketing or management (Lubienski 2009). While innovations in these areas may contribute positively, they are peripheral to core activities like curricula, teaching, testing, or grading (Bloom et al. 2015).

In Sweden, the national authority Skolinspektionen can both block the establishment of new schools and shut down existing schools that violate relevant laws. In 2021, the Swedish parliament passed a law to increase Skolinspektionen’s ability to shut down schools that exhibit serious and recurring failures in educational quality, and to extend these abilities from private schools to also include public schools.

There is a trade-off between the scope for innovation and quality control in the quasi-market setting, especially for an intangible asset like education. While it is desirable to capture the aspects of market dynamics that promote innovation on an aggregated scale, the sensitivity for failure is much higher when it comes to schooling because each individual only experiences the educational system once. As a consequence, failed innovations may have dire consequences for individual students. Furthermore, the quality of quality control is dependent both on the regulatory framework to be evaluable, and on public spending to enable proportionate control and monitoring efforts. Too little quality regulation may cause unintended and undesired consequences in individual schools while also limiting quality control. Too much regulation may inhibit innovation and improvements in education. In a worst-case scenario, complicated or vague quality regulations could create skewed incentives and regulatory burden for providers of education, while also making quality control and monitoring difficult and expensive. In a best-case scenario, regulators manage to balance this trade-off so that limited but explicit regulation keeps the regulatory burden down and allows for a greater scope of innovation, while also enabling quality control at proportionate cost. In that case, quality control could amplify market-based signals related to successful innovations, for instance, through transparent reporting on evaluations.

Research on structural change suggests a significant difference between adopting new technologies and reaping the potential productivity gains from these technologies. The latter requires complementary organizational investments and innovations, i.e. the reorganisation of work (e.g., Brynjolfsson and Hitt 2003; Varian 2010; Brynjolfsson and McAfee 2014). Thus, restrictions on how work is organized tend to limit the potential for fully leveraging new technologies even after they have been introduced into the organization.

Complementary investments related to new technologies are costly. If there are no economic incentives, through competition or through the enforcement of quality regulation, to make these investments, they tend to be overlooked. In a worst-case scenario, investments in new technological equipment, especially if favored in a governmental digital transformation strategy or used as a marketing signal to attract students, may be used to cut costs rather than to improve educational quality.

Suppose restrictions on work organization are combined with pressure (from policy-makers, parents, or students) to invest in new technologies. In that case, the result may be overinvestment in underutilized technologies. This is exemplified in Swedish schools - both public and private - and elsewhere with digital transformation strategies measuring primarily the number of laptops or tablets as well as skills related directly to the use of these technologies, rather than how they are used to promote educational quality in other subject areas (Skolverket 2022b).

Rent-seeking: Firms are said to engage in rent-seeking (the term was coined by Krueger 1974) when they try to obtain benefits for themselves through the political system, for example by getting a subsidy for a good they produce or by lobbying for regulations to hamper their competitors (see e.g., Gustafsson et al 2009).

Given the widespread evidence on the value of political connections for firms (Fisman 2001; Lévêque 2020; Fu & Sun 2024), the rent-seeking incentives must be considered when a quasi market is designed. When education providers lobby to promote profit opportunities that conflict with the goals of the reform, regulatory capture emerges as another unintended consequence of the reform. In a case study of Sweden, Sebhatu & Wennberg (2023) show how voucher schools rely on and benefit from political ties.

Regulatory capture: Regulatory capture can be understood as a form of rent-seeking. The modern capture theory of political behavior was given a foundation by Downs (1957), who noted that private interests are willing to expend resources to see policies put into effect that will entrench their positions and enhance their wealth.

Opportunities for rent-seeking activities are present whenever government is present, but because quasi-markets are shaped by and created by political decisions that limit ordinary market mechanisms, incentives for regulatory capture and rent-seeking are significantly increased. The aim of regulatory capture is often to restrict or limit the scope of future competition through, for example, market entry or innovation. Because there is already a regulatory structure in place to limit competition in the traditional market sense, the quasi market is more exposed to such attempts at regulatory capture.

Note that lobbying is not necessarily a bad thing. Through lobbying, stakeholders channel what they deem to be important information towards legislators and policy-makers. Firms can choose to lobby to improve the conditions for their own business or to limit their competition. Ideally, lobbying conveys factual information from the lobbyist’s point of view, but firms can choose to present limited or even false information too. The issue for policy-makers is to weed out the relevant information conveyed through lobbying, to weigh it against other sources of information, and to consider if there are additional stakeholders that have not been heard on a particular issue.