Supplier Discretion Over Provision: Theory and an Application to Medical Care

34 Pages Posted: 17 Feb 2005

See all articles by James M. Malcomson

James M. Malcomson

University of Oxford - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: February 2005

Abstract

Suppliers who are better informed than purchasers, such as physicians treating insured patients, often have discretion over what to provide. This paper shows how, when the purchaser observes what is supplied but can observe neither recipient type nor the actual cost incurred, optimal provision differs from what would be efficient if the purchaser had full information, whether or not the supplier can extract informational rent. The analysis is applied to, among other things, data on tests for coronary artery disease and to Medicare diagnosis-related groups defined by the treatment given, not just the diagnosis, illustrating the biases in provision that result.

Keywords: supplier discretion, procurement, public provision, diagnosis-related groups, medicare, prospective payment, cost-effectiveness

JEL Classification: D82, H42, I11, I18

Suggested Citation

Malcomson, James M., Supplier Discretion Over Provision: Theory and an Application to Medical Care (February 2005). Available at SSRN: https://ssrn.com/abstract=668367 or http://dx.doi.org/10.2139/ssrn.668367

James M. Malcomson (Contact Author)

University of Oxford - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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