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When quality today affects service needs tomorrow

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  • Eika, Kari

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

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.

Suggested Citation

  • Eika, Kari, 2004. "When quality today affects service needs tomorrow," Memorandum 18/2004, Oslo University, Department of Economics.
  • Handle: RePEc:hhs:osloec:2004_018
    as

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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2004/Memo-18-2004.pdf
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    References listed on IDEAS

    as
    1. Norton, Edward C., 1992. "Incentive regulation of nursing homes," Journal of Health Economics, Elsevier, vol. 11(2), pages 105-128, August.
    2. Eika, Kari, 2003. "Low Quality-Effective Demand," Memorandum 36/2003, Oslo University, Department of Economics.
    3. 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.
    4. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    5. Spiller, Pablo T, 1996. "Institutions and Commitment," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 421-452.
    6. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
    7. 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.
    8. 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.
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    More about this item

    Keywords

    human services; quality of service; for-profit;

    JEL classification:

    • D69 - Microeconomics - - Welfare Economics - - - Other

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