Estimating Price Sensitivity of Economic Agents Using Discontinuity in Nonlinear Contracts

Abstract

This paper proposes a method to estimate price sensitivity of economic agents using nonlinear contracts. Our proposed estimator exploits 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 hospitals submit signi…cantly larger bills when the reimbursement rate is higher, indicating information asymmetries between the insurer and hospitals in this market. Our methodology is applicable to important classes of models such as consumer choice under nonlinear pricing and contracting with nonlinear incentives