Expense Preference Behavior and Contract-Management: Evidence from U.S. Hospitals

Southern Economic Journal, Vol. 64, No. 2 (October 1997)

Posted: 9 Oct 1997

See all articles by Avi Dor

Avi Dor

Case Western Reserve University - Department of Economics; National Bureau of Economic Research (NBER)

Sarah Duffy

Government of the State of Maryland - Health Services Cost Review Commission

Herbert Wong

Government of the United States of America - Agency for Health Care Policy & Research (AHCPR)

Abstract

This paper reports on a study of expense preference behavior in a conditional sample of hospitals (before and after adoption of contract-management arrangements), using an extension of Mester's (1989) test. To identify expense preference parameters, input demand equations are considered in addition to the cost function, and are estimated jointly with the cost function as a system of non-linear equations. Based on this test, contract-managers do not appear to be cost minimizers, although they tend to exhibit lower expense preference behavior than salaried managers. The importance of our results, however, goes beyond a single industry because we have shown that estimates of expense preference depend critically upon the particular input demand being studied. Studies that hitherto have relied on single input demand equations or on the cost function alone may have to be reinterpreted in this light.

JEL Classification: I11, L14, L21

Suggested Citation

Dor, Avi and Duffy, Sarah and Wong, Herbert, Expense Preference Behavior and Contract-Management: Evidence from U.S. Hospitals. Southern Economic Journal, Vol. 64, No. 2 (October 1997), Available at SSRN: https://ssrn.com/abstract=57709

Avi Dor (Contact Author)

Case Western Reserve University - Department of Economics ( email )

Cleveland, OH 44106
United States
216-368-4110 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sarah Duffy

Government of the State of Maryland - Health Services Cost Review Commission

Herbert Wong

Government of the United States of America - Agency for Health Care Policy & Research (AHCPR)

Hubert H. Humphrey Building
Washington, DC 20201
United States

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