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Soft Budget Constraints in Public Hospitals

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  • Donald J. Wright

Abstract

A soft budget constraint arises when a government is unable to commit to not ‘bailout’ a public hospital if the public hospital exhausts its budget before the end of the budget period. It is shown that if the political costs of a ‘bailout’ are relatively small, then the public hospital exhausts the welfare‐maximising budget before the end of the budget period and a ‘bailout’ occurs. In anticipation, the government offers a budget to the public hospital that may be greater than or less than the welfare‐maximising budget. In either case, the public hospital treats ‘too many’ elective patients before the ‘bailout’ and ‘too few’ after. The introduction of a private hospital reduces the size of any ‘bailout’ and increases welfare. Copyright © 2015 John Wiley & Sons, Ltd.

Suggested Citation

  • Donald J. Wright, 2016. "Soft Budget Constraints in Public Hospitals," Health Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 578-590, May.
    • Handle: RePEc:wly:hlthec:v:25:y:2016:i:5:p:578-590
    DOI: 10.1002/hec.3174
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    Cited by:

    1. Berger, Michael & Sommersguter-Reichmann, Margit & Czypionka, Thomas, 2020. "Determinants of soft budget constraints: how public debt affects hospital performance in Austria," LSE Research Online Documents on Economics 116865, London School of Economics and Political Science, LSE Library.
    2. Weicun Ren & Yizhen Zhao & Huiliang Zhong & Xiaoli Fu & Jian Wu, 2021. "Exploring the Optimal Allocation Decision-Making of Expenditure Budget in Hospitals Under Multi-Objective Constraints: Evidence from Urban Public Hospitals, China," SAGE Open, , vol. 11(4), pages 21582440211, December.
    3. Berger, Michael & Sommersguter-Reichmann, Margit & Czypionka, Thomas, 2020. "Determinants of soft budget constraints: How public debt affects hospital performance in Austria," Social Science & Medicine, Elsevier, vol. 249(C).

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