A Theory of Yardstick Competition
In the typical regulatory scheme a franchised monopoly has little incentive to reduce costs. This article proposes a mechanism in which the price the regulated firm receives depends on the costs of identical firms. In equilibrium each firm chooses a socially efficient level of cost reduction. The mechanism generalizes to cover heterogeneous firms with observable differences. Medicare's prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here.
Year of publication: |
1985
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Authors: | Shleifer, Andrei |
Published in: |
RAND Journal of Economics. - The RAND Corporation, ISSN 0741-6261. - Vol. 16.1985, 3, p. 319-327
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Publisher: |
The RAND Corporation |
Saved in:
Online Resource
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