health care spending in the us vs uk the roles of medical education costs malpractice risk and defensive medicine abstract we analyze how two key factors contribute to the high cost of healthcare in the us relative to the uk i the higher private cost of medical education and ii the higher risk of malpractice litigation to assess the role of these factors we formulate calibrate and simulate an equilibrium model of physician wages and the supply of medical graduates work hours and treatment decisions of practicing physicians and malpractice risk and malpractice insurance pricing consistent with prior work we find direct costs of malpractice fines and insurance explain little of the high cost of healthcare in the us however the high private cost of medical education interacts with high malpractice risk in an interesting way it leads doctors to i demand high wages and ii use excessive diagnostics to mitigate risk defensive medicine the agency problem that arises because patients cannot judge the efficacy of tests allows them to be over prescribed together these factors increase costs far more than direct malpractice costs specifically physician salaries plus diagnostic tests comprise 4 04 of gdp in the us compared to only 2 3 in the uk the mechanisms emphasized in our model can largely explain the difference our policy simulations imply that more generous medical education subsidies would lead to both improved patient welfare and reduced overall health care costs in the us system a pareto improvement we also find policies to i reduce malpractice risk or ii induce doctors to internalize a small part of diagnostic costs would have similar efficacious effects

lottery choice incentives complexity and decision time this paper reports the results of an experiment on lottery choice in which decision cost is measured as decision making time a simple decision cost model motivates this measurement and the experiment and predicts relationships between incentive mechanism manipulations and decision making time which are borne out in the experiment the decision cost model also suggests that decisions will change in the face of the incentive manipulations in the experiment this suggestion is borne out in a complex decision making environment but not in a simple one specification tests demonstrate that observed changes in subjects behavior are not merely due to changes in subject specific error variance one may conclude from this that the payoff dominance problem is a real issue in complex decision making experiments copyright 1993 by royal economic society

risk price regulation and irreversible investment abstract we show that regulators price setting rate base and allowed rate of return decisions are inextricably linked if prices are set so that regulated firms just break even whenever they are forced to invest breaking even ex ante is a necessary condition for ramsey pricing to be sustainable over time unless regulators adopt traditional rate of return regulation the irreversibility of much infrastructure investment significantly alters the results of the approach to price setting described by marshall et al 1981 marshall william j yawitz jess b greenberg edward 1981 optimal regulation under uncertainty journal of finance 36 4 909 921 in particular the practice of optimizing inefficient assets out of the regulated firm s rate base as occurs in total element long run incremental cost calculations in telecommunications exposes the firm to demand risk the firm requires an economically significant premium for bearing this risk and this premium is a function of both the systematic and unsystematic risk of demand shocks in addition we argue that if the firm is to break even under incentive regulation then the level of the rate base will exceed the optimized replacement cost by an amount which we interpret as the value of the excess capacity of the firm s assets if this component is excluded from the rate base incentive regulation will not be sustainable

tangible and intangible sunk costs and the entry and exit of firms in a small open economy the case of austria the paper provides evidence on the role of sunk costs as mobility barriers an empirical study of the austrian manufacturing industry explicitly considers sunk costs related to investment in dedicated intangible assets the results confirm the relevance of sunk costs as mobility barriers their symmetry with respect to entry and exit and show that the influence of sunk costs is robust to aggregation

information acquisition under risky conditions across real and hypothetical settings i collect data on how subjects acquire information about risky choices in both real and hypothetical settings using process tracing software called mouselab on average there are no significant differences across settings in the amount of time subjects take to make a choice or the completeness of the information they acquire subjects also acquire information in sequences consistent with an integration model of decision making such as expected utility theory or prospect theory i do not find significant differences in risk preferences across settings on average but i do find that subjects risk preferences are related to the completeness of the information that they acquire and where they start their information acquisition jel c91 d80 d83

risk aversion and incentive effects new data without order effects holt and laury 2002 used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions the main results of that paper were a subjects are risk averse even for relatively small payments of less than 5 b risk aversion increases sharply with large increases in the scale of cash payoffs and c there is no significant effect from increasing the scale of hypothetical payment with a few exceptions noted in the paper all treatments began with a low payment choice followed by a choice with hypothetical payments that had been scaled up by 20 50 or 90 followed by a real cash decision with the same high payment scale 20 50 or 90 followed by a single final low 1 real payment choice those in the 90 treatment could earn amounts ranging from 9 00 to 346 50 in this task as glenn w harrison et al 2004 correctly note this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks in a new experiment reported below we first seek to replicate harrison et al s finding that the order effect participating in a low payment choice before making a high payment choice magnifies the scale effect in a second treatment each subject completes the menu of lottery choices under just one payment condition 1 or 20 real or hypothetical thereby eliminating any order effects i new data

towards a micro founded theory of aggregate labour supply we build a heterogeneous agents life cycle model that captures a large number of salient features of individual male labour supply over the life cycle by education both along the intensive and extensive margins the model provides an aggregation theory of individual labour supply firmly grounded on individual level micro evidence and is used to study the aggregate labour supply responses to changes in the economic environment we find that the aggregate labour supply elasticity to a transitory wage shock is 1 75 with the extensive margin accounting for 62 of the response furthermore we find that the aggregate labour supply elasticity to a permanent compensated wage change is 0 44

limited horizon forecast in repeated alternate games abstract in two player infinite horizon alternating move games a limited forecast n 1 n 2 equilibrium is such that 1 player i chooses actions according to his n i length forecasts so as to maximise the average payoff over the forthcoming n i periods and 2 players equilibrium forecasts are correct with finite action spaces n 1 n 2 solutions always exist and are cyclical and the memory capacity of the players has no influence on the set of solutions a solution is hyperstable if it is an n 1 n 2 solution for all n 1 n 2 sufficiently large hyperstable solutions are shown to exist and are characterized for generic repeated alternate move 2 2 games journal of economic literature classification numbers c72 d81

what fraction of a capital investment is sunk costs to what extent are capital investments sunk costs this question is addressed by examining the salvage values of discarded metalworking machinery even though such assets are expected to be non specific many discarded assets are scrapped rather than sold on second hand markets econometric results suggest that firms can only expect to get back 20 50 percent of the initial price of a new machine once it is installed the results also indicate differences in value age profiles across firms but provide only weak support for the hypothesis that salvage values are particularly low during recessions

the marginal cost of public funds hours of work versus labor force participation this paper extends the theory and measurement of the marginal cost of public funds mcf to account for labor force participation responses our work is motivated by the emerging consensus in the empirical literature that extensive participation responses are more important than intensive hours of work responses in the modelling of extensive responses we argue that it is crucial to account for the presence of non convexities created by fixed work costs in a non convex framework tax and transfer reforms give rise to discrete participation responses generating first order effects on government revenue these revenue effects make the marginal cost of funds higher and we show numerically that the implications for mcf tend to be substantial

dynamic inefficiencies in an employment based health insurance system theory and evidence we investigate the effects of the institutional settings of the us health care system on individuals life cycle medical expenditures health is a form of general human capital labor turnover and labor market frictions prevent an employer employee pair from capturing the entire surplus from investment in an employee s health thus the pair underinvests in health during working years thereby increasing medical expenditures during retirement we provide empirical evidence consistent with the comparative statics predictions of our model using the medical expenditure panel survey meps and the health and retirement study hrs our estimates suggest significant inefficiencies in health investment in the united states

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

research and development cash flow agency and governance uk large companies this paper investigates the determinants of r d expenditure using a sample of uk listed companies with the highest spend from 2000 to 2005 we investigate the effect of corporate governance and ownership on r d using panel data the results provide some evidence that more governance tends to depress r d activity a finding that is robust to whether a composite or disaggregated index of governance is used one innovation of the paper is that we treat agency and finance effects interactively the ownership stake of the ceo appears to be supportive for r d

the value of life and the rise in health spending over the past half century americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result debate on health policy often focuses on limiting the growth of health spending we investigate an issue central to this debate is the growth of health spending a rational response to changing economic conditions notably the growth of income per person we develop a model based on standard economic assumptions and argue that this is indeed the case standard preferences of the kind used widely in economics to study consumption asset pricing and labor supply imply that health spending is a superior good with an income elasticity well above one as people get richer and consumption rises the marginal utility of consumption falls rapidly spending on health to extend life allows individuals to purchase additional periods of utility the marginal utility of life extension does not decline as a result the optimal composition of total spending shifts toward health and the health share grows along with income in projections based on the quantitative analysis of our model the optimal health share of spending seems likely to exceed 30 percent by the middle of the century

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

the paper work of medicine understanding international medical costs this paper draws on international evidence on medical spending to examine what the united states can learn about making its healthcare system more efficient we focus primarily on understanding contemporaneous differences in the level of spending generally from the 2000s medical spending differs across countries either because the price of services differs for example a coronary bypass surgery operation may cost more in the united states than in other countries or because people receive more services in some countries than in others for example more bypass surgery operations within the price category there are two further issues whether factors earn different returns across countries and whether more clinical or administrative personnel are required to deliver the same care in different countries we first present the results of a decomposition of healthcare spending along these lines in the united states and in canada we then delve into each component in more detail administrative costs factor prices and the provision of care received bringing in a broader range of international evidence when possible finally we touch upon the organization of primary and chronic disease care and discuss possible gains in that area

the fundamental problem of accounting the fundamental problem of economic accounting is to determine a forward looking schedule of rentals user costs or quasi rents to provide for the recovery of irreversible investments the method derived herein relaxes some restrictive assumptions that are common in capital theory there can be multiple forms of comprehensive capital accounting for all forms of capital including tangible and intangible capital is symmetrical the analytical focus becomes one of fixities and frictions and not optimality rentals obey inequalities as opposed to marginal conditions if discounted profit is positive rentals depreciation and capital value are not unique le probleme fondamental de la comptabilite le probleme fondamental de la comptabilite economique est de determiner une cedule des loyers couts d utilisation ou quasi rentes anticipes permettant de recuperer la mise de fonds dans des investissements irreversibles la methode proposee ici relaxe certains postulats restrictifs conventionnels en theorie du capital la comptabilite de toutes les formes de capital y compris le capital tangible et intangible est symetrique la focalisation analytique devient centree sur les fixites et les frictions et non l optimalite si le profit escompte est positif loyers depreciation et valeur du capital ne sont pas uniques

consumer search behavior and sunk costs abstract this paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost additionally once individuals have made a draw and then continued they should never return to a price drawn earlier exercise recall both of these predictions are tested in the paper and the results show that behavior is not always consistent with them it appears that individuals are making decisions based on the total return from searching rather than simply the marginal return from another draw

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

health care is an individual necessity and a national luxury applying multilevel decision models to the analysis of health care expenditures health care is neither a necessity or a luxury it is both since the income elasticity varies with the level of analysis with insurance individual income elasticities are typically near zero while national health expenditure elasticities are commonly greater than 1 0 the debate over whether health care is or is not a luxury good arises primarily from the failure to specify levels of analysis clearly so as to distinguish variation within groups from variation between groups apparently contradictory empirical results are shown to be consistent with a simple nested multilevel model of health care spending

search and satisficing many everyday decisions are made without full examination of all available options and as a result the best available option may be missed we develop a search theoretic choice experiment to study the impact of incomplete consideration on the quality of choices we find that many decisions can be understood using the satisficing model of herbert simon 1955 most subjects search sequentially stopping when a satisficing level of reservation utility is realized we find that reservation utilities and search order respond systematically to changes in the decision making environment jel d03 d12 d83