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Payment Mechanisms in the Healthcare Industry: An Experimental Study of Physician Incentives in a Multiple Principal Agent Setting

  • Ellen P. Green

    ()

    (Department of Economics, University of Delaware)

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    Current failures in the healthcare industry emphasize the need for a more fundamental understanding of how these contracts incentivize doctors. To aid this understanding, we treat the established physician-client-employer relationship as a multiple principal agent problem. We use a laboratory experiment, with a real-effort task, to test the relative performance of common payment mechanisms employed in this dual-principal agent relationship (Piece Rate, Flat Rate, Salary, Bonus, and Socialization). This study suggests, contrary to standard contract theory, that relying on extrinsic incentives to motivate physicians may be detrimental and costly for the healthcare industry.

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    File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2012/UDWP2012-11.pdf
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    Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 12-11.

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    Length: 29 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:dlw:wpaper:12-11.
    Contact details of provider: Postal: Purnell Hall, Newark, Delaware 19716
    Phone: (302) 831-2565
    Fax: (302) 831-6968
    Web page: http://www.lerner.udel.edu/departments/economics/department-economics/

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    1. Ma, Ching-to Albert & McGuire, Thomas G, 1997. "Optimal Health Insurance and Provider Payment," American Economic Review, American Economic Association, vol. 87(4), pages 685-704, September.
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    3. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
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    5. Guth, Werner & Ockenfels, Peter & Wendel, Markus, 1993. "Efficiency by Trust in Fairness? Multiperiod Ultimatum Bargaining Experiments with an Increasing Cake," International Journal of Game Theory, Springer, vol. 22(1), pages 51-73.
    6. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1985. "Tournaments and Piece Rates: An Experimental Study," Working Papers 85-21, C.V. Starr Center for Applied Economics, New York University.
    7. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Munich Reprints in Economics 22027, University of Munich, Department of Economics.
    8. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
    9. Amihai Glazer, 2008. "Optimal Contracts When a Worker Envies His Boss," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(1), pages 120-137, May.
    10. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
    11. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
    12. Dranove, David & Wehner, Paul, 1994. "Physician-induced demand for childbirths," Journal of Health Economics, Elsevier, vol. 13(1), pages 61-73, March.
    13. Gürtler, Marc & Gürtler, Oliver, 2012. "Inequality aversion and externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 111-117.
    14. Cromwell, Jerry & Mitchell, Janet B., 1986. "Physician-induced demand for surgery," Journal of Health Economics, Elsevier, vol. 5(4), pages 293-313, December.
    15. Gosden, Toby & Sibbald, Bonnie & Williams, Jackie & Petchey, Roland & Leese, Brenda, 2003. "Paying doctors by salary: a controlled study of general practitioner behaviour in England," Health Policy, Elsevier, vol. 64(3), pages 415-423, June.
    16. Frank, Bjorn, 1998. "Good news for experimenters: subjects do not care about your welfare," Economics Letters, Elsevier, vol. 61(2), pages 171-174, November.
    17. Hideshi Itoh, 2004. "Moral Hazard and Other-Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45.
    18. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
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