Abstract
When public production of a service is thrown open to competition, the process has broader effects than changed production costs. Empirical research indicates that even technical efficiency may fall when all the costs of the competitive bidding process are taken into account. Some of the costs can be measured, while some of them—such as work motivation—can only be classified. The focus of this article is to discuss the effects on employees of introducing marketization in the tax-financed services (quasi-markets) as a factor of inefficiency. In the labor-intensive service sector, where the contribution of employees is essential, these effects are fundamental. The article concludes that the significance of employees to internal efficiency (x-efficiency) of the competing organization should not be disregarded in accessing the efficiency of quasi-markets.