Soft Budget Constraints in Public Hospitals

Donald Wright

No 2015-03, Working Papers from University of Sydney, School of Economics

Abstract: A soft budget constraint arises when a government is unable to commit to not `bailout' a public hospital if the public hospital exhausts its budget before the end of the budget period. It is shown that if the political costs of a `bailout' are relatively small, then the public hospital exhausts the welfare maximising budget before the end of the budget period and a `bailout' occurs. In anticipation, the government offers a budget to the public hospital which may be greater than or less than the welfare maximising budget. In either case, the public hospital treats "too many" elective patients before the `bailout' and "too few" after. The introduction of a private hospital reduces the size of any `bailout' and increases welfare.

Keywords: soft budget constraint; public hospital; welfare (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-hea
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Journal Article: Soft Budget Constraints in Public Hospitals (2016)
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