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Budgets as Dynamic Gatekeepers

Listed author(s):
  • Harold Pollack

    (Yale University, Institution for Social & Policy Studies, 89 Trumbull Street, PO Box 208207, New Haven, Connecticut 06520-8207)

  • Richard Zeckhauser

    (Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, Massachusetts 02138)

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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Article provided by INFORMS in its journal Management Science.

Volume (Year): 42 (1996)
Issue (Month): 5 (May)
Pages: 642-658

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Handle: RePEc:inm:ormnsc:v:42:y:1996:i:5:p:642-658
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