Market failure in a universal welfare state?:Ownership, quality, and regulation in Danish social services

Abstract

Like many other countries, Denmark has recently seen a sharp increase in outsourced social service provision for children and adults. While quasi-market theory suggests that complex social services could be ill-suited to market provision, there has been little assessment of how ownership relates to service quality for welfare services due to fragmented data. This paper presents findings from a population-wide analysis of quality and inspection outcomes across public, non-profit, and for-profit providers in Denmark’s residential social services for children and working-age adults with support needs, including children’s homes and adult residential facilities (N=2375, 2020-2024). First, we document a 44.1% increase in for-profit providers over five years (2020-2024), while public and non-profit provision remained stable or declined. Second, for-profit providers were significantly more likely to receive regulatory sanctions including intensified monitoring and forced closure compared to other ownership types. Third, non-profit providers received higher quality ratings, while newer for-profit entrants underperformed relative to both public and older for-profit providers. Fourth, quality and regulatory differences were most pronounced between for-profit and not-for-profit providers rather than between public and private providers, indicating that ownership form and the profit-motive within the private sector matters more than the public-private distinction. These findings support theoretical claims that welfare markets for complex social services are prone to market failure due to information asymmetries, user complexity, and incomplete contracts. Finally, the findings have policy implications for market regulation, procurement and pricing strategies in terms of how to sustain high-performing providers in an increasingly marketised social service landscape