Open AccessEstimating price sensitivity of economic agents using discontinuity in nonlinear contracts
Author(s) -
Bajari Patrick,
Hong Han,
Park Minjung,
Town Robert
Publication year - 2017
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe602
Subject(s) - reimbursement , incentive , discontinuity (linguistics) , sensitivity (control systems) , nonlinear system , regression discontinuity design , nonlinear pricing , economics , actuarial science , health care , microeconomics , business , public economics , medicine , mathematics , engineering , economic growth , mathematical analysis , physics , pathology , quantum mechanics , electronic engineering
This paper proposes a method to estimate price sensitivity of economic agents exploiting discontinuity in nonlinear contracts. As an application, we study contracts between a managed care organization and hospitals for organ transplants. Exploiting donut holes in the reimbursement contracts, we show that the impact of the reimbursement rate on hospitals' provision of health care services varies significantly across patients with different levels of illness severity. Our methodology is applicable to important classes of models such as consumer choice under nonlinear pricing and contracting with nonlinear incentives.