Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model

Risk-neutral individuals take more risky decisions when they have limited liability. Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire information before taking decisions. Limited liability makes it optimal to increase the reward for outcomes relatively more likely to arise from desirable than from undesirable actions. The resulting decisions may be less, rather than more, risky. Making a decision after acquiring information provides an additional reason to those in the classic principal-agent literature for using contracts with pay increasing in the return. Further results on the form of contracts are also derived.managers, risky decisions, limited liability, principal-agent contracts, asymmetric information

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

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

Health Service Gatekeepers

Incentive contracts for gatekeepers who control patient access to specialist medical services provide too weak incentives to investigate cost further when expected cost of treatment is greater than benefit. Making gatekeepers residual claimants with a fixed fee from which treat-ment costs must be met (as with full insurers who are themselves gatekeepers) provides too strong incentives when expected cost is less than benefit. Giving patients the choice between a gatekeeper with an incentive contract and one without is unstable. With one scenario, pa- tients always prefer the latter. With another, patients have incentives to acquire information that makes incentive contracts ineffective.gatekeepers, patient referrals, general practitioners, fundholding, medical insurance, incentive contracts

General training by firms, apprentice contracts, and public policy

Workers will not pay for general on-the-job training if contracts are not enforceable. Firms may if there are mobility frictions. Private information about worker productivities, however, prevents workers who quit receiving their marginal products elsewhere. Their new employers then receive external benefits from their training. Training firms increase profits by offering apprenticeships committing them to high wages for trainees retained on completion. At those wages, only good workers are retained, which signals their productivity and reduces the external benefits if they subsequently quit. Regulation of apprenticeship length (a historically important feature) can enhance efficiency, as can appropriate subsidies.

Uncertainty, investment and productivity with relational contracts

With relational contracts, increased uncertainty with no change in factor prices is shown to reduce investment in the long run even if the parties are risk-neutral. This contrasts with models based on the impact of financial risk on the cost of capital and on the option value arising from irreversible investment. For the latter, Bloom et al. (Econometrica, 2018) find that a negative first-moment shock, in addition to increased uncertainty, best matches the data. This paper develops a relational contract model to demonstrate the impact of uncertainty on investment, depending on whether investment is general or specific. It then uses a specification calibrated with parameters from Bloom et al. (Econometrica, 2018) to show that this model can generate effects on productivity and investment of the magnitude of the negative aggregate shock in that paper purely with an increase in uncertainty

Competition in public service provision: the role of not-for-profit providers

With public services such as health and education, it is not straightforward for consumers to assess the quality of provision. Many such services are provided by monopoly not-for-profit providers and there is concern that for-profit providers may increase profit at the expense of quality. This paper explores the implications of entry by for-profit providers when there is unobserved quality. The model generates three key policy-relevant insights. First, by developing a novel approach to competition between different organizational forms, it frames the relevant trade-offs precisely. Second, it shows the value of keeping an incumbent not-for-profit as an active provider. Third, it characterizes the optimal payment (or voucher value) to an entrant for each consumer who switches in a way that can be applied empirically

The Impossibility of a Perfectly Competitive Labor Market

Using the institutional theory of transaction cost, I demonstrate that the assumptions of the competitive labor market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labor market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labor demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction cost and with zero transaction cost all labor is hired as independent contractors, implying multi-person firms, the employment relationship, and labor market disappear. With positive transaction cost, on the other hand, employment contracts are incomplete and the labor supply curve to the firm is upward sloping, again causing the labor demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. Working Paper 06-0

What's Driving the New Economy? The Benefits of Workplace Innovation

Using a unique nationally representative sample of U.S. establishments surveyed in both 1993 and 1996, we examine the relationship between workplace innovations and establishment productivity and wages. Using both cross-sectional and longitudinal data, we find evidence that high-performance workplace practices are associated with both higher productivity and higher wages. Specifically, we find a positive and significant relationship between the proportion of non-managers using computers and the productivity of establishments. We find that firms re-engineer their workplaces and incorporate` more high-performance practices experience higher productivity. For example, profit sharing is associated with increased productivity, and employee voice has a large positive effect on productivity when it is implemented in the context of unionized establishments. These workplace practices appear to explain a large part of the movement in multifactor productivity over the 1993-96 period. When we examine the determinants of wages within these establishments, we find that re-engineering a workplace to incorporate more high-performance practices leads to higher wages. However, increasing the usage of profit sharing results in lower regular pay for workers, especially technical workers and clerical/sales workers. Finally, increasing the percentage of workers meeting regularly in groups has a larger positive effect on wages in unionized establishments

Association of a dietary inflammatory index with cardiometabolic, endocrine, liver, renal and bones biomarkers: cross-sectional analysis of the UK Biobank study

Background and Aims: Research into the relationship between an Energy-adjusted Diet-Inflammatory Index (E-DII) and a wider health-related biomarkers profile is limited. Much of the existing evidence centers on traditional metabolic biomarkers in populations with chronic diseases, with scarce data on healthy individuals. Thus, this study aims to investigate the association between an E-DII score and 30 biomarkers spanning metabolic health, endocrine, bone health, liver function, cardiovascular, and renal functions, in healthy individuals. Methods and Results: 66,978 healthy UK Biobank participants, the overall mean age was 55.3 (7.9) years were included in this cross-sectional study. E-DII scores, based on 18 food parameters, were categorized as anti-inflammatory (E-DII <-1), neutral (-1 to 1), and pro-inflammatory (>1). Regression analyses, adjusted for confounding factors, were conducted to investigate the association of 30 biomarkers with E-DII. Compared to those with an anti-inflammatory diet, individuals with a pro-inflammatory diet had increased levels of 16 biomarkers, including six cardiometabolic, five liver, and four renal markers. The concentration difference ranged from 0.27 SD for creatinine to 0.03 SD for total cholesterol. Conversely, those on a pro-inflammatory diet had decreased concentrations in six biomarkers, including two for endocrine and cardiometabolic. The association range varied from -0.04 for IGF-1 to -0.23 for SHBG. Conclusion: This study highlighted that a pro-inflammatory diet was associated with an adverse profile of biomarkers linked to cardiometabolic health, endocrine, liver function, and renal health