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Public Sector Rationing And Private Sector Selection

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  • Ching-to Albert MA

    ()
    (Department of Economics, Boston University.)

  • Simona Grassi

    ()
    (University of Lausanne)

Abstract

We study the interaction between nonprice public rationing and prices in the private market. Under a limited budget, the public supplier uses a rationing policy. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two regimes. First, the public supplier observes consumers’ wealth information; second, the public supplier observes both wealth and cost information. The public supplier chooses a rationing policy, and, simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing policy. In the first regime, there is a continuum of equilibria. The Pareto dominant equilibrium is a means-test equilibrium: poor consumers are supplied while rich consumers are rationed. Prices in the private market increase with the budget. In the second regime, there is a unique equilibrium. This exhibits a cost-effectiveness rationing rule; consumers are supplied if and only if their cost–benefit ratios are low. Prices in the private market do not change with the budget. Equilibrium consumer utility is higher in the cost-effectiveness equilibrium than the meanstest equilibrium.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2011-021.

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Length: 34 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:bos:wpaper:wp2011-021

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References

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  1. Dennis Epple & Richard Romano, 2002. "Educational Vouchers and Cream Skimming," NBER Working Papers 9354, National Bureau of Economic Research, Inc.
  2. Blackorby, Charles & Donaldson, David, 1988. "Cash versus Kind, Self-selection, and Efficient Transfers," American Economic Review, American Economic Association, vol. 78(4), pages 691-700, September.
  3. Pau Olivella Cunill & Pedro Pita Barros, 2000. "Waiting Lists and Patient Selection," Econometric Society World Congress 2000 Contributed Papers 0283, Econometric Society.
  4. Besley, T. & Coate, S., 1989. "Public Provision Of Private Goods And The Redistribution Of Income," Papers, Princeton, Woodrow Wilson School - Discussion Paper 36, Princeton, Woodrow Wilson School - Discussion Paper.
  5. Peter Norman, 2004. "Efficient Mechanisms for Public Goods with Use Exclusions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(4), pages 1163-1188, October.
  6. Simona Grassi & Ching-to Albert Ma, . "Optimal Public Rationing and Price Response," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics wp2009-008, Boston University - Department of Economics.
  7. Simona Grassi & Ching-to Albert Ma, 2008. "Rationing Poor Consumers to Reduce Prices," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics wp2008-015, Boston University - Department of Economics.
  8. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and waiting times in hospital markets," Journal of Public Economics, Elsevier, vol. 92(7), pages 1607-1628, July.
  9. Iversen, Tor, 1997. "The effect of a private sector on the waiting time in a national health service," Journal of Health Economics, Elsevier, vol. 16(4), pages 381-396, August.
  10. Lindsay, Cotton M & Feigenbaum, Bernard, 1984. "Rationing by Waiting Lists," American Economic Review, American Economic Association, vol. 74(3), pages 404-17, June.
  11. Hoel, Michael & Saether, Erik Magnus, 2003. "Public health care with waiting time: the role of supplementary private health care," Journal of Health Economics, Elsevier, vol. 22(4), pages 599-616, July.
  12. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, Econometric Society, vol. 54(4), pages 923-42, July.
  13. Hoel, Michael, 2007. "What should (public) health insurance cover?," Journal of Health Economics, Elsevier, vol. 26(2), pages 251-262, March.
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Cited by:
  1. Ching-to Albert MA & Simona Grassi, 2010. "Optimal public rationing and price response," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2010-024, Boston University - Department of Economics.
  2. CANTA, Chiara, 2011. "Efficiency, access and the mixed delivery of health care services," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2011046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Rosella Levaggi & Marcello Montefiori, 2013. "Patient selection in a mixed oligopoly market for health care: the role of the soft budget constraint," International Review of Economics, Springer, vol. 60(1), pages 49-70, March.
  4. Simona Grassi & Ching-to Albert Ma, 2008. "Rationing Poor Consumers to Reduce Prices," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics wp2008-015, Boston University - Department of Economics.
  5. Simona Grassi & Ching-to Ma, 2010. "Subsidy design: wealth versus benefits," Journal of Economics, Springer, vol. 101(1), pages 49-72, September.

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