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Budgets as Dynamic Gatekeeprs

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Author Info

  • Pollak, H.
  • Zeckhauser, R.

Abstract

Most large organizations allocate resources by means of fixed budgets: each subunit is normally entitled to spend a defined amount over a fixed period, usually one year. Fixed budgets create clear incentives for subunits to control costs. Yet such arrangements create major incentives for dynamic inefficiency, for example by encouraging subunits to exhaust their budgets toward the end of the fiscal year. This paper develops a dynamic optimization model to examine the incentives fostered by budget systems. It invokes the metaphor of physicians involved in a health care delivery system to examine incentives created by decentralized "gatekeeping" as a mechanism to control medical costs. The paper also discusses some methods to reduce the incentives for dynamic inefficiency that fixed budgets create.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1667.

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Length: 35 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:harver:1667

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Related research

Keywords: health services ; budget;

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Cited by:
  1. Stephen Martin & Nigel Rice & Peter Smith, 1997. "Risk and the GP budget holder," Working Papers 153chedp, Centre for Health Economics, University of York.
  2. Karen Eggleston, 2001. "Multitasking, Competition and Provider Payment," Discussion Papers Series, Department of Economics, Tufts University 0101, Department of Economics, Tufts University.

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