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Expense Preference Behavior and Contract‐Management: Evidence from U.S. Hospitals
Author(s) -
Dor Avi,
Duffy Sarah,
Wong Herbert
Publication year - 1997
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.1997.tb00072.x
Subject(s) - preference , economics , function (biology) , revealed preference , microeconomics , test (biology) , demand curve , sample (material) , extension (predicate logic) , econometrics , actuarial science , computer science , paleontology , chemistry , chromatography , evolutionary biology , programming language , biology
This paper reports on a study of expense preference behavior in a conditional sample of hospitals (before and after adoption of contract‐management arrangements) using an extension of Mester's (1989) test. To identify expense preference parameters, input demand equations are considered in addition to the cost function and are estimated jointly with the cost function as a system of nonlinear equations. Based on this test, contract managers do not appear to be cost minimizers, although they tend to exhibit lower expense preference behavior than salaried managers. The importance of our results, however, goes beyond a single industry because we have shown that estimates of expense preference depend critically upon the particular input demand being studied. Studies that hitherto have relied on single input demand equations or on the cost function alone may have to be reinterpreted in this light.