Incentive Contracts for Public Health Care Provision under Adverse Selection and Moral Hazard

The author will in this paper analyse the issue of payment reforms for a public health care system, where public hospitals offer treatment. Any health care system should provide treatment so as to maximise expected social welfare. The implementation of this outcome, through the way private og public health care providers or hospitals are compensated for the cost of providing services, has been a policy issue in a number of countries. Many payment reforms are now based on a (high-powered) DRG-price system, so as to induce cost consciousness. The hospitals are privately informed about the diseases of each patient and offer treatment with a stochastic outcome, while cost control cannot be verified. Ex post outcome and realised cost of treatment can be verified, with cost depending on treatment intensity, cost-reducing effort and the type of disease. With a disease-contingent transfer, the hospital is able to capture a rent, which has a social cost due to tax distortions and because rent has no direct weight in the welfare function. When type of treatment can be verified, treatment should be less intensive than under complete information, if marginal cost of treatment is disease-dependent. However, rent extraction is accomplished not only by a less aggressive treatment (which has a negative impact on the likelihood for recovery), but also by offering a cost-reimbursement scheme, without any recovery-contingent bonus. When treatment is unverifiable, induced treatment should again be below the first-best level. This solution is implemented through a combination of a recovery-contingent bonus (declining in severity) and cost sharing (with the fraction of cost being reimbursed by the government being increasing in severity).Public health care; hospital expenses

Environmental regulation, asymmetric information and foreign ownership

Regulating an export firm (or a homogeneous industry) with private information about emission technology is analysed, when the firm, owned partly by foreigners, has an option to bypass domestic regulation through costly relocation. If the firm chooses to relocate, it will set up a new plant in a region practicing environmental dumping, at a cost that is correlated with emission efficiency, so as to make the firm’s reservation utility type-dependent. We characterise the set of optimal contracts offered by the uninformed, domestic government under different ownership structures, when domestic taxation is distortive, and when welfare is the sum of consumers’ surplus and the share of the firm’s rent accruing to domestic residents. With complete information, ownership has no real effects. When information is incomplete, ownership matters, due to rent extraction, being of greater significance when ownership rights are shifted towards foreigners. Rent extraction is accomplished by offering contracts with lower output and higher net emissions to a subset of the most efficient types (being induced to stay), whereas a subset of the least efficient types should be induced to relocate. A demand for environmental dumping is being induced by the domestic government’s concern for national interests. When barriers towards foreign ownership are lowered, and then shifting the distribution of ownership rights in the favour of foreigners, more pollution will be generated for types of the firm that do not exit, whereas a larger fraction of the firm types should be induced to relocate

Domestic Environmental Policy under Asymmetric Information: The role of foreign ownership, outside options and market power

We analyse environmental policy under asymmetric information in a context where a homepolluting firm, selling its final output solely in a foreign market with some market power, has an option to bypass domestic regulation through setting up new plants in a jurisdiction offering lenient environmental standards. The hidden characteristics are emission intensity and outside option, assumed perfectly correlated, so that the firm has a type-dependent reservation utility. There is mixed ownership to the firm; a fraction is owned by foreigners whose welfare does not enter the home government’s objective function. The home government has a limited set of policy instruments; in fact only net emissions can be taxed. The familiar trade-off between efficiency and rent extraction will involve over-pollution, with (possibly) a subset of the most emission-intensive firm types being induced to relocate. This effect is reinforced by increased foreign ownership, as the cost of leaving rent then increases. (Ownership has no real impact under complete information.) Weaker market power, due to increased competition at the world market, will work in the same direction, but now there is a counteracting effect due to a lower outside option.Asymmetric information; environmental regulation; globalisation

A Discrete-Choice Model Approach to Optimal Congestion Change

We model the choice of transportation mode in a simplified Hotelling-like city, with a fixed number of total travellers, fixed road capacity and with no trade-off between when to travel and the time spent in a queue. A person that chooses to take her own car will inflict a congestion cost on all travellers. To get the travellers to internalise these external costs, a congestion charge has to be imposed. We derive an optimal congestion charge within in a discrete-choice framework, with a benevolent government maximising expected tax-adjusted social surplus. The congestion charge to be imposed on private driving, beyond the opportunity cost – equal to the fare on public transportation – is shown to be a weighted average of a Ramsey-like term (capturing the goal to raise public revenue) and a Pigou-term capturing the environmental cost of a person’s private driving. This property is similar to the optimal environmental tax derived by Sandmo (1975). However, the behavioural assumption underlying the present framework is quite different from the standard theory of consumer choice adopted by Sandmo.Discrete choice; urban transport; congestion; congestion charges

Climate Change, Catastrophic Risk and the Relative Unimporartance of Discounting

Discounting in the presence of catastrophic risk is a hotly debated issue, in particular with respect to climate change. Many scientists and laymen concerned with potentially catastrophic impacts feel that if an increase in the discount rate drastically increases the likelihood of catastrophic outcomes, this discredits economic cost-benefit calculations. This paper argues that this intuition is sound and that if cost-benefit calculations are done within a model that encompasses the type of catastrophic risk that these scientists worry about, the resulting stabilization target will only be slightly influenced by the discount rate. This is shown within a stylized model of a risk neutral decision maker facing a problem with a catastrophic threshold with unknown location.climate change; discounting; catastrophic risk; optimal control