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When quality today affects service needs tomorrow

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  • Eika, Kari

    ()
    (Dept. of Economics, University of Oslo)

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    Abstract

    Quality in the human services has long term effects. Reduced quality of service now increases the service recipients’ future service needs and other social costs. This paper shows that such effects should be considered when a government designs contracts with a for-profit service provider. If the contract relies on verifiable information only, short contract periods fail to give the provider proper incentives to internalize future effects of quality. Long term contracts are problematic if the effects of quality are not over time indicated by verifiable measures. Relational contracts seem more robust to changes in the model’s informational assumptions and rely on trust to deal with holdups. Long term quality effects matter for the relative merits of intergrated provision and contracting out, and may create adverse quality incentives if a for-profit provider has market power.

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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2004/Memo-18-2004.pdf
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    Bibliographic Info

    Paper provided by Oslo University, Department of Economics in its series Memorandum with number 18/2004.

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    Length: 30 pages
    Date of creation: 27 Oct 2004
    Date of revision:
    Handle: RePEc:hhs:osloec:2004_018

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    Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
    Phone: 22 85 51 27
    Fax: 22 85 50 35
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    Web page: http://www.oekonomi.uio.no/indexe.html
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    Related research

    Keywords: human services; quality of service; for-profit;

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    References

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    1. Eika, Kari, 2003. "Low Quality-Effective Demand," Memorandum 36/2003, Oslo University, Department of Economics.
    2. Hart, Oliver & Shleifer, Andrei & Vishny, Robert W, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1127-61, November.
    3. McGuire, Thomas G., 2000. "Physician agency," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 9, pages 461-536 Elsevier.
    4. Spiller, Pablo T, 1996. "Institutions and Commitment," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 421-52.
    5. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    6. Chalkley, Martin & Malcomson, James M., 2000. "Government purchasing of health services," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 15, pages 847-890 Elsevier.
    7. David M. Cutler & Richard J. Zeckhauser, 1999. "The Anatomy of Health Insurance," NBER Working Papers 7176, National Bureau of Economic Research, Inc.
    8. Norton, Edward C., 1992. "Incentive regulation of nursing homes," Journal of Health Economics, Elsevier, vol. 11(2), pages 105-128, August.
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