Electronic Thesis and Dissertation Repository

Degree

Doctor of Philosophy

Program

Business

Supervisor

Dr. Gregory S. Zaric

2nd Supervisor

Dr. Hubert Pun

Joint Supervisor

Abstract

I study the impact of different incentives on strategic decisions of parties that have the option of cooperating with each other. Incentive problems are well studied in various contexts, such as supply chain management and healthcare operations management. However, in the fast-changing business environment, there is a need to study and understand the new and emerging strategic behaviors of firms to adopt better incentive mechanisms and reach desired outcomes. This dissertation consists of three essays that examine the strategic behavior of parties under different incentive schemes. In the first essay, I study the supply chain partnership of two potential competitors and evaluate the impact of limited capacity on their strategic behavior. An increasing number of original brand manufacturers (OBMs) do not have in-house production capability, and thus rely on competitive contract manufacturers (CCMs) on the supply side. This increasing demand puts CCMs in a capacity allocation dilemma between their own product and the OBM’s product. I derive the conditions that incentivize the two potential competitors to cooperate and compete (coopetition), compete, or only cooperate (supply chain partnership). I show that the OBM might multi-source its component demand only when competition in the final-product market is intense. Moreover, the CCM can be worse off from having more capacity, even when that CCM’s capacity is available for free. The second and third essays are inspired by changes in healthcare funding models that reward quality care. In the second essay, I examine performance-based payment contracts to promote the optimal use of an optional diagnostic test for cancer patients. This essay is inspired by three ongoing trends: tremendous increases in the cost of new advanced cancer drugs, development of new diagnostic tests to allow physicians to tailor treatments to patients, and changes in healthcare funding models that reward quality care. I model the interaction between two parties—a healthcare payer and an oncologist—where the oncologist has private information about the patient’s characteristics (adverse selection) and the payer does not know whether the optimal course of action is used by the oncologist (moral hazard). I demonstrate that, in the presence of information asymmetry, an oncologist should never test all patients, even when the diagnostic test is available for free. I also show that it is not iii always socially optimal to make a diagnostic test compulsory, even if such a policy can be implemented for free. In the third essay, I study gain-sharing agreements between a hospital and a healthcare provider that can only treat a patient and achieve the desired quality of care with collective effort. The Centers for Medicare and Medicaid Services (CMS) introduced a bundled payment model for lower extremity joint replacement (LEJR) that offers hospitals a fixed bundled payment for a patient’s treatment expenses during acute and post-acute care. This bundled payment model aims to incentivize hospitals to enter into agreements with providers to ensure that the total treatment cost and care quality meets the bundled payment requirements. However, I show that the bundled payment does not always incentivize a hospital to offer gain-sharing agreements to the provider. Furthermore, I show that the provider prefers a low bundled payment, such that the hospital needs the provider to reduce the total cost of treatment.

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