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Investment in hospital care technology under different purchasing rules: a real option approach

  • Rossella Levaggi


    (Universit… di Brescia)

  • Michele Moretto


    (Universit… di Padova)

Quality of health care is the product of several factors as the literature has long recognized. In this article we focus on the relationship between quality and investment in health technology by analysing the optimal investment decision in a new health care technology of a repre sentative hospital that maximises its surplus in an uncertain environment. The new technology allows the hospital to increase the quality level of the care provided, but the investment is irreversible. The article uses the framework of the real option literature to show how the purchaser might in?uence the quality level by setting a quality-contingent long-term contract with the hospital.The investment in new technology is in fact best incentivated within a long-term contract where the number of treatments reimbursed depends on the level of investment made when the technology is new. In this way, asymmetry of information does not affect the outcome of the contract. In our model in fact the purchaser can verify the level of the investment only at the end of each period but the purchasing rule has an anticipating eÏect on the decision to invest.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0046.

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Length: 36 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:pad:wpaper:0046
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  8. Rossella Levaggi & Michele Moretto & Vincenzo Rebba, 2007. "Investment decisions in hospital technology when physicians are devoted workers," "Marco Fanno" Working Papers 0048, Dipartimento di Scienze Economiche "Marco Fanno".
  9. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
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