Product differentiation with multiple qualities

We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each of two firms can choose the levels of an arbitrary number of qualities. Consumers’ valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the effects of qualities on the rival’s equilibrium price in the general model. Equilibrium qualities depend on what we call the Spence and price-reaction effects. For any equilibrium, we characterize conditions for quality differentiation.Accepted manuscrip

Information acquisition, referral, and organization

Each of two experts may provide a service to a client. Experts' cost comparative advantage depends on an unknown state, but an expert may exert effort to get a private signal about it. In a market, an expert may refer the client to the other for a fee. In equilibrium, only one expert exerts effort and refers, and the equilibrium allocation is inefficient. Referral efficiency can be restored when experts form an organization, in which a referring expert must bear the referred expert's cost. However, the referred expert shirks from work effort because of the lack of cost responsibility.2018-11-1

Changing preferences: an experiment and estimation of market-incentive effects on altruism

This paper studies how altruistic preferences are changed by markets and incentives. We conduct a laboratory experiment in a within-subject design. Subjects are asked to choose health care qualities for hypothetical patients in monopoly, duopoly, and quadropoly. Prices, costs, and patient benefits are experimental incentive parameters. In monopoly, subjects choose quality to tradeoff between profits and altruistic patient benefits. In duopoly and quadropoly, we model subjects playing a simultaneous-move game. Each subject is uncertain about an opponent's altruism, and competes for patients by choosing qualities. Bayes-Nash equilibria describe subjects' quality decisions as functions of altruism. Using a nonparametric method, we estimate the population altruism distributions from Bayes-Nash equilibrium qualities in different markets and incentive configurations. Markets tend to reduce altruism, although duopoly and quadropoly equilibrium qualities are much higher than those in monopoly. Although markets crowd out altruism, the disciplinary powers of market competition are stronger. Counterfactuals confirm markets change preferences.Accepted manuscrip

Service motives and profit incentives among physicans

We model physicians as health care professionals who care about their services and monetary rewards. These preferences are heterogeneous. Different physicians trade off the monetary and service motives differently, and therefore respond differently to incentive schemes. Our model is set up for the Norwegian health care system. First, each private practice physician has a patient list, which may have more or less patients than he desires. The physician is paid a fee-for-service reimbursement and a capitation per listed patient. Second, a municipality may obligate the physician to perform 7.5 hours per week of community services. Our data are on an unbalanced panel of 435 physicians, with 412 physicians for the year 2002, and 400 for 2004. A physician’s amount of gross wealth and gross debt in previous periods are used as proxy for preferences for community service. First, for the current period, accumulated wealth and debt are predetermined. Second, wealth and debt capture lifestyle preferences because they correlate with the planned future income and spending. The main results show that both gross debt and gross wealth have negative effects on physicians’ supply of community health services. Gross debt and wealth have no effect on fee-for-service income per listed person in the physician’s practice, and positive effects on the total income from fee-for-service; hence, the higher income from fee-for-service is due to a longer patient list. Patient shortage has no significant effect on physicians’ supply of community services, a positive effect on the fee-for-service income per listed person, and no effect on the total income from fee-for service. These results confirm physician preference heterogeneity.physicians; incentive schemes; patient list; fee-for-service reimbursement; capitation per listed patient

Product Differentiation with Multiple Qualities

We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers’ valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the equilibrium effects of qualities on the rival’s price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities

Information Disclosure and the Equivalence of Prospective Payment and Cost Reimbursement

A health care provider chooses unobservable service-quality and cost-reduction efforts. The efforts produce quality and cost efficiency. An insurer observes quality and cost, and chooses how to disclose this information to consumers. The insurer also decides how to pay the provider. In prospective payment, the insurer fully discloses quality, and sets a prospective payment price. In cost reimbursement, the insurer discloses a value index, a weighted average of quality and cost efficiency, and pays a margin above cost. The first-best quality and cost efforts can be implemented by prospective payment and by cost reimbursement. Cost reimbursement with value index eliminates dumping and cream skimming. Prospective payment with quality index eliminates cream skimming

Uterus at a price: Disability insurance and hysterectomy

Taiwanese Labor, Government Employee, and Farmer Insurance programs provide 5 to 6 months of salary to enrollees who undergo hysterectomies or oophorectomies before their 45th birthday. These programs create incentives for more and earlier treatments, referred to as inducement and timing effects. Using National Health Insurance data between 1997 and 2011, we estimate these effects on surgery hazards by difference-in-difference and bunching-smoothing polynomial methods. For Government Employee and Labor Insurance, inducement is 11-12% of all hysterectomies, and timing 20% of inducement. For oophorectomies, both effects are insignificant. Enrollees' behaviors are consistent with rational choices. Each surgery qualifies an enrollee for the same benefit, but oophorectomy has more adverse health consequences than hysterectomy. Induced hysterectomies increase benefit payments and surgical costs, at about the cost of a mammogram and 5 pap smears per enrollee.Accepted manuscrip

Experience benefits and firm organization

A principal needs a worker for the production of a good. The worker can be hired as an internal agent, or an external agent under a contract. These two organizational modes correspond to in-house production and outsourcing, respectively. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benefits, and can do so when production is outsourced. However, the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benefits when production is in-house because the internal agent must be provided with a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, one between information rent under outsourcing and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high, but her organizational choice may be socially inefficient