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Hospital Competition with Soft Budgets
Author(s) -
Brekke Kurt R.,
Siciliani Luigi,
Straume Odd Rune
Publication year - 2015
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12111
Subject(s) - bailout , economics , incentive , welfare , profit (economics) , confiscation , competition (biology) , cost efficiency , microeconomics , macroeconomics , financial crisis , market economy , ecology , biology , political science , computer science , law , operating system
We study the incentives for quality provision and cost efficiency for hospitals with soft budgets, where the payer can cover deficits or confiscate surpluses. While a higher bailout probability reduces cost efficiency, the effect on quality is ambiguous. Profit confiscation reduces both quality and cost efficiency. First‐best is achieved by a strict no‐bailout and no‐profit‐confiscation policy when the regulated price is optimally set. However, for suboptimal prices, a more lenient bailout policy can be welfare‐improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high‐cost patients.