Soft Budget Constraints in Public Hospitals

A soft budget constraint arises when a government is unable to commit to not bailout' a public hospital if the public hospital exhausts its budget before the end of the budget period. It is shown that if the political costs of a bailout' are relatively small, then the public hospital exhausts the welfare-maximising budget before the end of the budget period and a bailout' occurs. In anticipation, the government offers a budget to the public hospital that may be greater than or less than the welfare-maximising budget. In either case, the public hospital treats too many' elective patients before the bailout' and too few' after. The introduction of a private hospital reduces the size of any bailout' and increases welfare. Copyright (c) 2015John Wiley & Sons, Ltd.