Mixed Ownership Markets: Theory and Evidence from Hospitals in the US and China
- Presenter:
Mon June 5, 2006 9:30-10:45 Room Alumni Lounge
A mixture of government and private ownership, including both not-for-profit and for-profit firms, is an abiding feature of healthcare delivery in many established market economies and is emerging in many developing and transitional economies. Yet virtually no existing theories model endogenous co-existence of government, private nonprofit and for-profit ownership in a market, or focus on the normative question of whether the co-existence of all three forms is socially desirable. This paper aims to fill this gap through a parsimonious theoretical “merger” of the noncontractible quality theory of ownership (Hart, Shleifer and Vishny 1997; Glaeser and Shleifer 2001) and the theory of soft budget constraints as a dynamic commitment problem (Kornai, Maskin and Roland 2003). I argue that endogenous soft budget constraints are a more compelling explanation of the soft incentives of government managers than that presented by Hart, Shleifer and Vishny (1997), that government managers are more replaceable than private managers. In fact, it seems to be quite the opposite: government employment is often more stable than that in the private sector, frequently entailing a lower wage in exchange for more job security. Consistent with empirical evidence from US hospitals (e.g., Duggan 2000; Baicker and Staiger 2005), I allow for both a predatory principal (the ratchet effect) and soft principal (the soft budget constraint) in the same context, operating on different margins.
The model helps to explain why most industries are dominated by private for-profit firms; why some sectors such as healthcare tend to be dominated by private not-for-profit and government providers; and what factors drive the changing patterns of ownership mix across industries over time. In the model, private entrepreneurs are most responsive to market conditions; government provision assures supply (access) but is differentially prone to soft budget constraints and slower innovation. Mixed ownership lessens the social cost of government provision because competitive discipline and private R&D leads to contractibility - with a lag - for many aspects of innovation. I present evidence consistent with the model from two contrasting contexts: a meta-analysis of hospital ownership and performance in the US; and recent data on government and private hospitals in China.
