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

James Malcomson ()

No 221, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: 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 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.

Keywords: Supplier discretion; Procurement; Public provision; Diagnosis-related groups; Medicare; Prospective payment; Cost-effectiveness (search for similar items in EconPapers)
JEL-codes: D82 H42 I11 I18 (search for similar items in EconPapers)
Date: 2005-01-01
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Journal Article: Supplier Discretion Over Provision: Theory and an Application to Medical Care (2005)
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