Rosella Levaggi

Flypaper Effect and Sluggishness: Evidence from Regional Health Expenditure in Italy

In Italy, public expenditure reduction is achieved through a revision of social security and health care programs. In particular, public health expenditure control has been implemented through a reform that imposes more stringent budget rules to local governments and a considerable reduction in grants-in-aid from the central government. This paper investigates empirically whether the response to this decrease in categorical lump-sum grants from the central to local governments results in an asymmetric response to intergovernmental grants. Hard budget and soft budget constraint hypotheses are estimated by using a sample of cross-sectional and time observations covering the 20 Italian regions over the period 1989–1993. The main finding is the existence of a standard and a super flypaper effect in both models. The introduction of the soft-budget constraint hypothesis results in a stronger effect of grants and a lower response of own resources which shows that local governments prefer to incur some deficit instead of reducing health care expenditure.

Regulation strategies for public service provision

Public service provision has undergone a significant process of reform through the reduction of vertical integration in its supply and the introduction of competition. The aim of these reforms is to increase efficiency and ultimately to improve welfare, but these goals can be reached only if the appropriate regulation tool is chosen. In this paper we compare different ways of regulating the market in order to extract the information rent from the provider, in an environment where the regulator cannot observe quality and production costs and the workforce is represented by devoted workers. In particular, we will compare forms of competition in the market, such as spatial competition, with several forms of Dutch first price auctions for the market.

A Note on Optimal Tax Evasion in the Presence of Merit Goods

In a recent article Davidson, Lawrence and Wilson propose a model showing that, in the presence of distortionary taxations and goods of different quality, tax evasion can be an optimal device. Here, we show that this result, although quite interesting, cannot be generalised to a framework where Government activity consists of supplying merit goods and levying taxes to finance their provision.

Delay is Not the Answer: Waiting Time in Health Care & Income Redistribution

In this paper, the use of delay as a tool to improve income redistribution is examined. We assume that people with the highest opportunity cost of waiting address their demand to the private market; if these, as we assume, are the ones at the higher end of the income distribution, they contribute through income tax, and pay for the private care they receive as well. Thus, public and private provision of health care, made mutually consistent within a utility-based approach by the presence of delay, may be used to modify income distribution. Our model modifies the results obtained by the current literature and shows that, when individual utilities are strictly quasi-concave and a cost-minimization framework is replaced by a Bergson-Samuelson welfare function maximisation, delay is no longer welfare improving. The reason is that, even when an optimum delay exists, the correspondent social maximum is a local maximum. The scope for using delay is then confined to environments where the Central Government’s power to tax is not sufficient to raise adequate resources or where, due to tax evasion or high tax distortions, second best tax instruments should be used.

It Takes Three to Tango: Soft Budget Constraint and Cream Skimming in the Hospital Care Market

Cream skimming is an illegal behaviour that consists in choosing to treat patients according to their ability to recover. It arises from the use of prospective payment schemes in an asymmetry of information framework. In this context in fact the provider can observe some relevant information (freely or at a cost) before making its effort which will then be used to its own advantage. The paper studies the scope for these types of behaviour in a mixed market for hospital care where the hospitals do not share the same objectives. We show that in this context cream skimming is made possible by the presence of two important elements: the public hospital prefers to treat high severity patients and the regulator is unable to enforce hard budget constraint rules. The paper adds an important dimension to the study of cream skimming as proposed by the traditional literature where asymmetry of information alone is considered the cause of this market failure. In our context, in fact, cream skimming arises mainly from a regulatory failure.

Welfare Properties of Restrictions to Health Care Services Based on Cost Effectiveness

In this note we explore the welfare properties of the cost effectiveness criterion as an instrument to improve the appropriateness of health care. We show that such instrument is optimal only under specific assumptions relating to the shape of the welfare function and the utility of health care.

Tax Evasion and the Cost of Public Sector Activities

This article examines the effects of tax evasion on the cost of goods and services in an environment where input prices are homogenously taxed but evasion is intersectorially differentiated. Tax evasion raises the relative cost of producing goods and services in the sectors where evasion is more difficult. Such an effect adds a potentially important but so far neglected element to the relative cost of goods and services produced by the public sector. The general equilibrium analysis presented in this article shows the perverse effects of tax evasion, which reduces total production (and hence total wealth) even in a model where because of the absence of redistributive effects, tax evasion is simply fiscal illusion.

Optimal Procurement Contracts under a Binding Budget Constraint

The traditional literature on agency models predicts that, for zero liability contracts, it is optimal for the principal to pay for the information he cannot observe. However, this principle is not valid for a set of contracts mostly used by government agencies whose distinguishing feature is represented by a stringent budget constraint for the principal. This paper shows that in this environment the principal will either choose a structure exibiting pooling or a bargaining solution. The bargaining solution represents the analytical proof to the intuition of the difficulty in implementing procurement contracts stated by Laffont and Tirole (1993).

Emotions in physician agency

Two ingredients seem essential in understanding the patient-physician relationship: (i) the physicians informational advantage and (ii) the relevance of the patients emotions. Health economics has placed great emphasis on the first phenomenon, whereas the second has been considered only recently, that is with the growth of fields of analysis such as Economics and Psychology and Behavioral Medicine, and few investigations have been undertaken. In this article, we survey and discuss the important changes of perspective which the theory that studies the patient-physician relationship has undergone over time. We focus, in particular, on the attitude of patients towards health information and on the role of patient information in physician agency.

NHS CONTRACTS : AN AGENCY APPROACH

The White Paper Working for Patients has produced dramatic changes in the organization of health care in the UK that will soon be followed by analogous reforms in other countries. The core of the reform is represented by the separation of the responsibility for purchasing health care from providing the services. The creation of this internal market is said to enhance efficiency, but some peculiar characteristics of health care prevent a Pareto optimal solution being reached. This paper describes the purchaser-provider relationship using an innovative principal agent model to assess the relative merits of the different forms of contracts. The model is also used to show how competition among providers allows the purchaser to extract this private information. From a theoretical point of view, the approach is innovative in the formulation of the principals objective function; the interesting finding is that the presence of a stringent budget constraint alters both risk-sharing conditions and the First-best contract proposed by the literature. From a policy point of view, the paper explains why in the first wave over 75% of contracts between purchasers and providers were block contracts. It is also demonstrated why this contractual form should be avoided.