Exit, voice and the quality of public service delivery

1
Exit, voice and the quality of public service
delivery

• Deborah Wilson
• November 2006
• Preliminary do not cite

2
Introduction

• The use of choice as a mechanism to improve
  public service delivery is well known.
• Current UK policy discourse increasingly
  considers voice as a further, user-driven
  mechanism.
• Choice and voice are considered to be
  complementary
• Choice and voice should complement each other.
  .. Bottom up pressure through choice and voice
  can..give everyone, including the disadvantaged,
  better quality services. (PMSU 2006, page 10)

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• The discourse about choice and voice working
  together to improve quality comes from
  Hirschmans (1970) book Exit, voice and
  loyalty.
• According to Hirschman in response to
  deterioration in quality of a firms product or
  service, consumers have two forms of response
  exit and voice. These provide a signal to the
  firm, who responds by improving
  quality.(Self-correcting mechanism).

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Aims of the paper

• To scrutinise the assumption that choice (exit)
  and voice complement each other in creating
  user-driven incentives to increase quality of
  public service provision
• When do they complement each other? When do they
  not?
• What are the likely outcomes in each case?
• Institutional design / policy issues.
• To identify a framework which links user-driven
  incentives with the design of a performance
  management system. Need consistency between
  top-down and bottom-up elements of reform.

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Overview

• Hirschmans exit, voice and loyalty.
• In particular, focus on three scenarios with
  regard to quality
• Uni-dimensional quality
• Multi-dimensional quality
• Consumer as quality maker.
• Application of Hirschmans analysis to the
  education sector.
• Different notions of quality (basis for choice)
  enable us to link choice/voice with performance
  management.
• Policy implications.

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Hirschmans exit, voice and loyalty

• Basic idea
• Process of decline in the quality of a firms
  output activates certain consumer responses which
  act as endogenous forces of recovery.
• Two contrasting categories exit and voice.
• Exit economic, market mechanism.
• Voice political, non-market mechanism.
• Particular focus
• How, and under what circumstances, exit and voice
  may combine to best rectify or reverse a decline
  in quality of firms product/service.

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• how a typical market mechanism and a typical
  non-market, political mechanism work side by
  side, possibly in harmony and mutual support,
  possibly also in such a fashion that one gets
  into the others way and undercuts its
  effectiveness (EVL, p18).
• To be effective, the signal used should
  correspond with that to which the organisation is
  responsive.
• Particular problem
• Over-emphasis on exit may atrophy voice, even in
  circumstances when voice may be the most
  effective mechanism for improving quality.

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• Exit
• Exit is the sort of mechanism economics thrives
  on. Clean, impersonal.
• Leave organisation / stop purchasing product if
  quality deteriorates (absolutely or relatively).
• Different forms of exit.
• Voice
• Voice here is defined as any attempt to change,
  rather than to escape from, an objectionable
  state of affairs, whether through individual or
  collective petition to the management in charge,
  through appeal to a higher authority with the
  intention of forcing a change in management, or
  through various types of actions and protests,
  including those that are meant to mobilize public
  opinion (EVL p30).
• Different forms of voice (individual and
  collective).

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• Loyalty
• Psychological, not behavioural.
• May hold exit at bay and activate voice.
• May be understood in terms of a generalised
  barrier to exit. The barrier may be directly
  imposed or internally generated.

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Quality

• Hirschman identifies three scenarios with regard
  to quality
• A change in quality is felt in the same direction
  by all (quality is uni-dimensional)
• A change in quality is felt in different
  directions by different consumers
  (multi-dimensional)
• Consumers are quality makers (cf quality
  takers).
• Note consumers have different quality
  elasticities of demand in each scenario.

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(1) Uni-dimensional quality

• Quality increases or decreases are felt as such
  by all consumers, who may be differentially
  sensitive to such change.
• Exit and voice are two responses to a decline in
  quality. Both work to increase quality (if
  organisation is responsive to the signal used)
  they are complementary.
• Spillovers between alert and inalert consumers.
• Exit may atrophy voice
• Presence of exit may prevent investment in voice
• Most quality-sensitive (and therefore potentially
  most vocal) likely to be the first to exit.
• Tension presence of exit reduces voice, but
  effectiveness of voice increases if exit is
  possible.

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• So if quality change felt in same direction by
  all consumers
• Exit and voice are complementary
• Spillovers between alert and inalert consumers
• Potential for over-emphasis on exit even when
  firm more responsive to voice may prevent/delay
  recovery.

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(2) Multi-dimensional quality

• Now consider the case when a change in quality is
  not appreciated as such by all consumers, i.e.
  consumers have a differential appreciation of
  quality change.
• Can also think in terms of quality being
  multi-dimensional firm changes quality in one
  dimension appreciated by some, not by others.
• Now, organisations have the possibility of
  changing quality in such a way as to please some
  while displeasing others which will they
  select?
• Quality path of the organisation depends on its
  responsiveness to exit and/or voice
• For example, if it is more responsive to exit
  than voice, the organisation is more likely to
  correct deviations from normal quality that are
  obnoxious to its exit-prone customers. This may
  not be seen as an improvement by vocal consumers.
  Or vice versa.

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• So if consumers have a differential appreciation
  of the same quality change
• Exit and voice do not necessarily complement each
  other.
• There are no externalities between alert and
  inalert consumers if they value different aspects
  of quality.

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(3) Consumers are quality makers

• Notion of consumers as quality makers introduced
  in Hirschmans discussion of loyalty.
• The importance of loyaltyis that it can
  neutralize within certain limits the tendency of
  the most quality-conscious customers or members
  to be the first to exit (EVL page 79).
• Loyalty delays provides a barrier to exit.
• Staying within a declining organisation may be
  rational if
• By exiting, the quality of the organisation
  further declines, i.e. the consumer is a quality
  maker and
• Consumer cares about quality of the organisation
  even after s/hes left it.
• This in turn implies s/he doesnt fully exit
  (voice from within compared to voice from
  without).

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Application to the education sector

• Key players
• Government schools parents/pupils.
• What is quality?
• Quality as value added / effectiveness
• Quality as the basis for parental choice
• Pupil as quality maker (input as well as output
  to the educational production process) link to
  how quality is measured (the performance
  management system).

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• First consider quality as value added
• Corresponds to government aim.
• Uni-dimensional improvement in value added is
  felt as such by all consumers.
• Exit (choice) and voice are complementary.
  Spillovers between alert and inalert consumers.

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• Problem of exit atrophying voice?
• Recall Exit reduces/prevents investment in
  voice, and most vocal exit first, so less scope
  for voice.
• This is not a problem if schools are more
  responsive to exit than voice.
• Degree of responsiveness of schools to different
  signals is determined by the incentives they
  face, i.e. by the design of the performance
  management (PM) system.
• Current system school incentives based on choice
  rather than voice.
• Alter incentive structure to engage more with
  user voice?
• So if all key players are interested in quality
  as value added, choice and voice should
  complement each other. Design of PM system
  central to degree of responsiveness of schools.

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• But are parents only interested in value added?
• Evidence suggests that the basis for choice is
  multi-dimensional that parents have different
  preferences across different dimensions of school
  quality test scores, composition, ethos,
  expressive order .
• In this case, Hirschman analysis predicts that
  there is no guarantee that choice and voice will
  complement each other nor will there be
  spillovers between alert and inalert consumers if
  they value different aspects of quality.
• Outcome (quality path) will depend on school
  response both w.r.t. different signals, and
  w.r.t. different consumer types.

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To whom will schools respond?

• Consider first different consumer types, and
  recall the idea of a pupil as a quality maker.
• Any measure of educational output which doesnt
  account for input includes some notion of the
  pupil as a quality maker.
• Schools have the incentive to care about output
  as measured by raw test scores
• League tables key performance indicator
  5A-C.
• Schools have the incentive to respond to signals
  from positive quality makers, whose exit would
  reduce quality as measured by raw test scores.
• Parents also interested in raw outcome
  dimension of quality provides information about
  peer group.

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To which signal(s) will schools respond?

• In education context, positive quality makers are
  likely to be the most exit-prone and most vocal.
• Contrary to Hirschman, there may not be a
  conflict between responding to exit or responding
  to voice.
• Instead, a school has the incentive to respond to
  either signal from the positive quality maker
  consumer type.
• So choice and voice do complement each other
  (even though quality is multi-dimensional) BUT
  only for one type of consumer, due to the
  incentive structure facing schools.
• Outcome? schools have the incentive to focus on
  the elements of quality preferred by positive
  quality makers.

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In summary

• If a change in quality felt in same direction by
  all, choice and voice complement each other
  quality improves for all.
• If a change in quality is felt in different
  directions by different consumers, this may no
  longer be the case
• Choice and voice may work in different
  directions
• Choice and voice may work in the same direction
  but only for a subset of consumers.
• Application to the (current, English) education
  sector suggests the latter, so the current policy
  discourse is misleading.

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Key elements of the problem, as applied to the
education (?) sector

• Policy maker aim to improve value added use
  choice/voice as policy tool.
• Consumer basis for choice (and voice) is
  multi-dimensional different consumers have
  different preferences across the dimensions.
• Provider incentives at least partly determined
  by a performance management system which includes
  raw output summary statistics.
• Different notions of quality (basis for choice)
  enable us to link choice/voice with performance
  management. Response of providers crucial.

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Consider 2 broad (tentative) policy implications

• (1) Government, consumers and providers all care
  about the same notion of quality (value added).
  
• Design performance management (PM) system facing
  providers so that their targets, surplus, etc
  depend on value added rather than raw output.
• Also required value added as the basis for
  choice for consumers.
• How reasonable either/both of these are depend on
  the public service being considered more
  possible in health than education, for example?

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• (2) Government, consumers and providers care
  about different notions/dimensions of quality
  (e.g. current English education market).
• Possible to (better) align school incentives by
  altering design of PM system in particular,
  focus on value added cf raw outcomes in league
  tables.
• Parents basis for choice? Hard to think of this
  as (ever) being uni-dimensional.
• Peer group important for parent and school
  consumer as quality maker.

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• Change the incentives facing both organisation
  and consumers
• Formula funding more money for negative
  quality makers.
• League tables value added rather than raw
  outcomes.
• Re-consider information provision more generally
• Current emphasis increasing informed choice to
  traditionally inalert consumers reducing the
  barriers to exit that they face.
• What about the traditionally alert consumers?
  More balanced information provision about the
  local comprehensive? Engender some loyalty
  encourage voice from within to help instigate
  improvement rather than exit. (NB schools will
  need the incentive to respond to the voice of
  all).

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Conclusions

• Choice and voice complement each other in
  improving quality only when quality is
  uni-dimensional.
• If not, the outcome depends both on the
  incentive structure facing the provider, which
  may in turn be affected by different consumer
  types
• Choice and voice may work in opposite directions
  or they may complement each other for a subset of
  consumers.
• The different notions of quality provide one way
  of linking the Hirschman analysis with the issue
  of performance management design, in order to
  achieve consistency between user-driven
  incentives and performance management structures.