an efficiency explanation for why firms second source firms facing research costs and demand uncertainty may engage in second sourcing in which potential suppliers agree to pool production facilities i show how sellers and buyers both can benefit from the practice second sourcing allows firms to meet a wider range of possible rates of demand and often to supply a given rate of demand at a lower total cost than under non cooperation buyers benefit through a reduced probability of stock outs and frequently a lower purchase price semiconductor industry data are found to be consistent with the paper s predictions i introduction the practice of second sourcing is frequently observed among firms facing technological and demand uncertainty second sourcing encompasses agreements between buyers and sellers requiring that a firm license its proprietary technology to rivals as well as agreements among potential suppliers to pool production facilities the first type of agreement is often explained as guaranteeing buyers a secure supply at a fair price in this type of second sourcing agreement control over production and pricing decisions resides with each supplier the second arrangement where the owner of the production technology controls production and pricing has largely been overlooked by the literature despite its adoption by firms in a wide range of technologically dynamic industries including semiconductors robotics and biotechnology a primary motivation for this second form of secondsourcing i will argue is to achieve a more efficient matching between the industry s productive capacity and market demand this paper indicates how second sourcing of this form may benefit both purchasers and suppliers and identifies the conditions making second sourcing profitable for firms the existing literature has offered two explanations for second sourcing according to the first explanation second sourcing is sought by prospective buyers purchasers may require that a developer license alternative suppliers to force revelation of private cost information in the contract bidding process or to discipline the eventual supplier s pricing behavior examples of this line of reasoning are found in riordan and sappington 1989 anton and yao 1987 demski sappington and spiller 1987 and rob 1986 if this motivation is correct however it is sufficient for firms to compete at the contract bidding stage demsetz 1968 in contrast we often observe competition at the production stage with active second sourcing and a large number of licensed alternative suppliers in a single industry see section v this explanation s exclusive focus on the gains to buyers from second sourcing also is inconsistent with swann s 1987 observation that many manufacturers have actually sought second sources the literature s alternative explanation suggests that second sourcing may be preferred by producers farrell and gallini 1988 and shepard 1987 show how a monopoly supplier can use second sourcing as a commitment not to raise price or lower product quality in the future either of which would debase the value of sunk investments made by prospective purchasers if credible this commitment may stimulate industry demand sufficiently to yield higher profits for the former monopolist despite increased product market competition an important shortcoming of this second explanation is its apparent incongruity with the existence of five six or more second sourced suppliers in a single industry shepard 1987 for example shows that a single licensed alternate supplier will provide the monopolist with its desired credible commitment to future price and quality this paper suggests an alternative explanation that is consistent with observed trends in second sourcing i depart from the existing literature s focus upon principal agent problems to analyze secondsourcing in a market flamework the paper indicates why sellers may secondsource voluntarily explains why multiple second sources will be preferred and shows how both sides in the agreement may benefit

the institutional causes of china s great famine 1959 1961 this paper studies the causes of china s great famine during which 16 5 to 45 million individuals perished in rural areas we document that average rural food retention during the famine was too high to generate a severe famine without rural inequality in food availability that there was significant variance in famine mortality rates across rural regions and that rural mortality rates were positively correlated with per capita food production a surprising pattern that is unique to the famine years we provide evidence that an inflexible and progressive government procurement policy where procurement could not adjust to contemporaneous production and larger shares of expected production were procured from more productive regions was necessary for generating this pattern and that this policy was a quantitatively important contributor to overall famine mortality

centralized pricing versus delegating pricing to the salesforce under information asymmetry the issue of delegating pricing responsibility to the salesforce is of interest to marketing academics and practitioners it has been shown by lal 1986 that under certain situations with information asymmetry it is more profitable for the firm to delegate pricing authority to the salesforce than to have centralized pricing in this paper we re examine situations where information asymmetry exists and analyze its effect on the decision of the firm to set a price or delegate pricing responsibility to the salesforce using contract theory we find that when the salesperson s private information can be revealed to the firm through contracting centralized pricing performs at least as well as price delegation we derive the optimal centralized pricing contract under a set of standard assumptions used in the economics and business literature

exit and inefficiency the effects of ownership type this study uses data on hospital closures to examine the relation between exit and inefficiency in an industry where for profit not for profit and government firms coexist the likelihood of hospital exit over the period 1986 91 is estimated as a function of hospital relative inefficiency ownership type and other factors where hospital relative inefficiency is measured using residuals from estimation of a stochastic frontier cost function we find that less efficient hospitals were more likely to exit when ownership was for profit or not for profit but that relative inefficiency did not have a significant effect on the probability of exit for government hospitals

are hospitals seasonally inefficient evidence from washington state efficiency measurement has been one of the most extensively explored areas of health services research over the past two decades despite this attention few studies have examined whether a provider s efficiency varies on a monthly quarterly or other sub annual basis this article presents an empirical study that looks for evidence of seasonal inefficiency using a quarterly panel of general acute care hospitals from washington state we find that hospital efficiency does vary over time however the nature of this dynamic inefficiency depends on the type of efficiency being measured our results suggest that technical and cost efficiency vary by quarter allocative and scale efficiency also vary on a quarterly basis but only if the data are jointly disaggregated by quarter and another firm specific factor such as size or operating status thus future research corporate decisions and government policies designed to improve the efficiency of hospital care need to account for seasonal trends in hospi

preference revelation and monopsony abstract 1 johnson demonstrated the formal equivalence between the free rider problem and monopsony 2 vickrey s method for eliminating the inefficiencies resulting from monopsony monopoly works by converting simple monopsonists monopolists into perfectly discriminating monopsonists monopolists 3 we show that three recently proposed solutions to the free rider problem have the same rationale i e they use clarke taxes to convert johnson s simple monopsonists into perfectly discriminating monopsonists the three mechanisms are those of i clarke and groves ii groves and ledyard and iii arrow the relationships between these mechanisms and between each of them and monopsony are analyzed diagrammatically

regulating a monopolist with unknown demand and cost functions we consider the design of regulatory policy when the regulator is imperfectly informed about both the firm s cost function and the demand function it faces to some extent the optimal policy here is the natural combination of the optimal policies when there is uncertainty only about either demand or cost important qualitative differences also exist however for example it may be optimal to set prices below marginal cost and the pricing authority delegated to the firm may be more limited when there is uncertainty about both cost and demand

measuring hospital efficiency with frontier cost functions this paper uses a stochastic frontier multiproduct cost function to derive hospital specific measures of inefficiency the cost function includes direct measures of illness severity output quality and patient outcomes to reduce the likelihood that the inefficiency estimates are capturing unmeasured differences in hospital outputs models are estimated using data from the aha annual survey medicare hospital cost reports and medpar we explicitly test the assumption of output endogeneity and reject it in this application we conclude that inefficiency accounts for 13 6 percent of total hospital costs this estimate is robust with respect to model specification and approaches to pooling data across distinct groups of hospitals

adjustment to production uncertainty and the theory of the firm a comment this paper reconsiders the model presented by flacco and kroetch 1986 it shows that with additive technological uncertainty the firm will produce and contract to sell the same output as under certainty when the flacco kroetch model is generalized to allow the firm to select contract commitments and planned output ex ante no simple comparisons with certainty are possible these results are broadly consistent with those obtained by mills 1959 1962 for demand uncertainty

economies of scale and scope in the provision of diagnostic techniques and therapeutic services in portuguese hospitals this article analyses the provision of auxiliary clinical services that are typically carried out within the hospital we estimate a flexible cost function for three of the most important cost wise diagnostic techniques and therapeutic services in portuguese hospitals clinical pathology medical imaging and physical medicine and rehabilitation our objective in carrying out this estimation is the evaluation of economies of scale and scope in the provision of these services for all services we find evidence of economies of scale and some evidence of economies of scope we also find evidence of diminishing returns to management whereby larger hospitals appear to have surpassed their optimal size these results have important policy implications and can be related to the ongoing discussion of where and how should hospitals provide these services

the public accounting industry production function abstract a translog function is specified to represent the relation between revenue and human resource inputs in public accounting firms estimation of the model using a balanced panel of annual data for 64 large cpa firms for the period 1995 1999 indicates that increasing returns to scale prevail in the public accounting industry justifying recent merger and acquisition activities among accounting firms average marginal revenue product of partners increased monotonically from 1995 to 1998 decreased slightly in 1999 and was about nine times that of other professionals during 1995 1999 the public accounting industry exhibited continuing improvement in productivity over the 5 years

assessing productivity changes in uk hospitals reflecting technology and input prices in this study malmquist productivity indexes are used to evaluate the performance of acute hospitals in the uk over the period after the introduction of the internal market in the national health service in 1991 the indexes are computed using nonparametric programming known as data envelopment analysis and they are decomposed into multiple component measures to give insights into the trends in hospital performance overall it is found that productivity regressed in the year after the reforms but progressed thereafter so that overall there was a net progress both as far as the inputs and costs are concerned productivity progress is mainly due to overall efficiency progress which in turn is mostly attributed to allocative efficiency improvements technical change resulted in a small reduction in the amount of inputs used but also at higher production costs because of a worsening in the match between input mixes and relative input prices however it is suggested that the gains in productivity are not

wage distortion and resource allocation under uncertainty the effects of uncertainty on resource allocation have been examined in a two sector general equilibrium model of production constructing a model in which firms are risk indifferent and face uncertainty regarding the use of capital rothenberg and smith 9 considered the implications of uncertainty for welfare resource allocation and income distribution their model was refined by batra 3 to permit uncertainty in production to influence the firms decisions to hire both capital and labor batra s approach appears to be more general in that producers are assumed to be risk averse in lieu of risk neutral the writing of this paper is inspired by batra s contributions 2 3 batra s well known intermediate run equilibrium model is reformulated to allow for wage distortion utilizing the model several issues regarding the effects of changes in factor supplies in commodity prices and in the degree of wage distortion will be examined factor market distortions in the absence of uncertainty have been studied extensively in literature 2 their impacts on resource allocation in stochastic environment have not been explored however we argue that the introduction of the wage differential has a major impact on batra s results first relative value factor intensities generally replace relative physical factor intensities in determining signs of

adjustment to production uncertainty and the theory of the firm this paper considers the behavior of the firm which faces uncertainty in its production process but can adjust its output once the uncertainty is resolved ex post adjustment unlike previous treatments involves a marginal cost penalty if more output is required and a lowering of price if too much is produced with ex post adjustment allowed in this fashion it is found that nonlinear risk preferences do not affect the sign of the firm s marginal risk premium at optimum ex ante output the firm will produce less output than under certainty whether it is risk averse risk neutral or prefers risk

prices vs quantities and delegating price authority to a monopolist this paper examines the desirability of allowing a monopolist to determine the market price we find that none of the regulatory mechanisms previously discussed in the prices vs quantities literature strictly dominates unregulated monopoly price setting furthermore despite suggestions by others price setting by a regulated monopolist whose profits coincide with society s net benefits is not always the most desirable means of control quantity setting by such a monopolist may instead be the preferred choice combining both into one incentive compatible mechanism provides the best regulatory scheme and one in which the regulator need not be informed about costs

effectiveness of environmental regulations under imperfect enforcement and the firm s avoidance behavior this paper explicitly defines enforcement quality and develops a model by incorporating enforcement quality and the firm s avoidance behavior the results indicate that the effectiveness of environmental regulations is likely to depend upon the level of enforcement quality as well as upon the nature of the firm s avoidance behavior policy instruments may become incompatible under certain circumstances enforcement quality should be properly targeted to enhance functional harmonization between instruments the condition under which emission tax is more effective under imperfect enforcement than under complete enforcement is also identified

input choices and uncertain demand the theory of the firm under demand uncertainty has to date assumed that the firm s input decisions are unaffected by the stochastic nature of demand this assumption is not usually made explicitly but it is implied by the assumption that the firm s cost function presumably derived by finding the minimum cost combination of inputs for any given level of output is unaffected by the uncertainty however if firms must choose some of their inputs before the uncertainty regarding demand is resolved then different input decisions may involve different levels of risk since firms decisions regarding price and output are affected by demand uncertainty and non linear risk preferences as previous authors have shown it seems reasonable to suspect that their input decisions will also be affected but if input decisions are affected then firms cost functions are not invariant to uncertainty and the results of previous studies must be reexamined three different types of firms are considered in this paper the competitive firm the quantity setting imperfect competitor and the price setting imperfect competitor input decisions of the competitive firm and the quantity setting imperfect competitor are shown to be unaffected by demand uncertainty and hence the assumption of an unchanging cost function is appropriate in these cases for the price setting imperfect competitor however input decisions are influenced by demand uncertainty and an unchanging cost function is therefore not appropriate this case is considered in some detail and conditions under which results can differ from those previously reported in the literature are examined

what do stochastic frontier cost functions tell us about inefficiency abstract recent studies using the stochastic frontier approach have suggested high levels of inefficiency in nursing home and hospital facilities this paper makes two observations first one could falsely estimate high levels of inefficiency if a statistical assumption zero skewness of the random component of the cost residual is violated second an inefficient industry may be difficult to distinguish either statistically or visually from an industry free of inefficiency if available panel data yields more robust estimates of cost differences among nursing homes or hospitals

comparing french and us hospital technologies a directional input distance function approach french and us hospital technologies are compared using directional input distance functions the aggregation properties of the directional distance function allow comparison of hospital industry level performance as well as standard firm level performance with regard to productive efficiency in addition the underlying constituents of efficiency in the short run congestion and technical inefficiency and in the long run scale inefficiency are analysed by decomposing the overall measure by virtue of using the directional distance function it is also possible to obtain an estimate of a lower bound on allocative inefficiency it is found that french and us hospitals use quite different technologies long run scale inefficiencies cause most of the french hospitals inefficiency while short run technical inefficiency is the main source of overall productive inefficiency in the us hospitals

behavioural differences among hospitals it is ownership or location by about 1988 the consensus among leading health economists was that no meaningful differences existed among hospitals of differences owernership form and this position was embraced by the antitrust division of the us department of justice but behavioural differences among hospitals of different among hospitals of different owernership has continued to be a matter of both academic and judicial interest recent empirical studies have concluded that real differences do exist while many earlier studies reached the opposite conclusion this contradiction in finding over time as competition intensified is exactly opposite to what expense preference theory would predict we examine this apparent paradox using a very general test of behavioural differences by hospital ownership we find that the omission of location specific variables can lead to biased estimates of ownership effects and that no significant behavioural differences exist among private california hospitals in 1986 90 when this source of o

on delegating price authority to a regulated firm this article models a regulatory environment in which the regulated firm possesses better information about demand conditions than does the regulator the regulator would like to tie prices to the firm s private information in a socially optimal way to do so the regulator must induce the firm either truthfully to reveal private information or equivalently unilaterally to set socially optimal prices this is accomplished by assessing lump sum subsidies or taxes that depend in an appropriate way on the prices announced by the firm this mechanism can be reinterpreted as a two part tariff scheme whereby both the service fee and price per unit respond to shifting demand conditions

technological uncertainty and the theory of the firm several recent articles 1 6 have generalized the theory of the firm to incorporate price uncertainty and risk aversion it is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium leland 5 provides a similar generalization given demand uncertainty however in each case the assumption of a well specified technology is maintained this paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm s optimal production decision like the earlier work on the theory of the firm we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium unlike the earlier work we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm s technology we show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior like its predecessors the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision we modify the baron and sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output as a result the entrepreneur s decision yields a random variable denoting output and a linear transformation of it denoting profit the entrepreneur chooses the random variable denoting profit to maximize his expected utility there are at least three distinct ways in which our notion of technological uncertainty may be interpreted first the entrepreneur may not know the location of the production surface in this case each production decision yields a random output an increase in the

payment source and the cost of hospital care evidence from a multiproduct cost function with multiple payers abstract this study investigates the capacity of hospitals to vary the intensity of their services based on patients expected sources of payment while the concept of price discrimination by hospitals based on payer generosity cost shifting has been discussed extensively the notion that hospitals can adjust payer specific marginal costs to reflect differences in reimbursement policies has not been studied in depth to examine this issue this analysis employs a multiproduct cost function with hospital outputs defined as admissions by payment source controlling for the distribution and severity of illness casemix for each payer marginal costs of casemix adjusted discharges are obtained and compared for medicare medicaid private payers and a residual category that includes uncompensated care we find that indeed payer specific marginal costs generally reflect payer generosity

a note on adjustment to production uncertainty and the theory of the firm this paper analyzes the impact of production uncertainty on the firm s optimal output decision if uncertainty is introduced by an additive risk variable then short run optimal output is unchanged but the owner manager s expected utility can change causing long run output effects if uncertainty is introduced by a multiplicative random variable then short run output can change as well

an international comparison of hospital efficiency does institutional environment matter the consensus among many health economists is that no meaningful performance differences exist among for profit and non profit hospitals in the us but this topic has continued to be a matter of academic judicial and public policy interest a similar debate has ensued internationally regarding the potential efficiency gains from privatization of public enterprises in this paper we examine empirical evidence from the public highly regulated norwegian hospital sector and the private highly competitive and unregulated california hospital sector to ascertain whether institutional environment and level of market competition significantly affect the degree of productive efficiency in hospitals we compare and discuss the productive efficiency of four similar sets of hospitals operating in different institutional and competitive environments the four samples are carefully matched in the dimensions of sample size hospital size and average lengths of stay heterogeneity in output definition is used to co

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

assessing the technical and allocative efficiency of hospital operations in greece and its resource allocation implications abstract in this paper we seek to develop a research framework concerning the assessment of the efficiency of public sector hospital operations public hospitals are increasingly under pressure to improve their operations both in terms of resources they use and also in terms of the quantity and quality of their outcomes the assessment of efficiency entails both the notions of technical and allocative efficiency as they yield complementary information about the management effectiveness of individual hospitals technical efficiency has a diagnostic purpose as it yields comparative information about the effectiveness with which individual units convert their input resources into outputs on the other hand allocative efficiency has a planning orientation since the objective of the assessment is to gauge efficiency improvements by means of resource reallocation a linear programming based model is proposed for assessing allocative efficiency in the light of uncertainty about the prices of input factors the empirical part of the paper is based on data from greek public hospitals results and policy implications are discussed based on data from 98 general hospitals based on information from 1992 it was found that significant inefficiencies are present in the operations of greek hospitals that account approximately for 100 mecu in 1992 prices