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  5. Contracts and Markets: New Developments
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Contracts and Markets: New Developments

Paper Session

Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)

Hilton Riverside, Cambridge
Hosted By: Econometric Society
  • Chair: Marzena Joanna Rostek, University of Wisconsin-Madison

Contracting over Rebates: Formulary Design and Pharmaceutical Spending

Robin S. Lee
,
Harvard University
Kate Ho
,
Princeton University

Abstract

Prescription drug spending in the U.S. is high and increasing. This paper investigates whether the structure of the formulary developed by pharmacy benet managers (PBMs) on behalf of plan sponsors can meaningfully constrain spending by affecting drug manufacturer rebates. We first develop a theoretical model in which a single PBM contracts with multiple manufacturers over a menu of rebates corresponding to different formularies. Given this menu, the PBM then chooses a formulary. We next use data from Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees, to estimate a model of enrollee demand for statins, and simulate the impact of changing the number of tiers or allowing for exclusion on predicted rebates. Predicted rebate magnitudes are consistent with the previous literature. Rebates increase substantially with the PBM's ability to move drugs to less preferred tiers.

Vertical Integration with Incomplete Information

Simon Loertscher
,
University of Melbourne
Leslie M. Marx
,
Duke University

Abstract

Using an independent private values model, we analyze the effects of and incentives for vertical integration. Each firm is characterized by an amount of internally held resources and a maximum demand for these resources as inputs, which determine the firm's extent of vertical integration, and a distribution for the firm's private marginal value for resources. After private information is realized, firms trade resources and payoffs are realized. Depending on type realizations, a vertically integrated firm may sell resources to others, buy resources from others, and/or consume resources held internally. A certain extent of vertical integration is necessary and sufficient for the first-best to be possible. With two firms, equilibrium vertical integration is socially optimal but with more firms, vertical integration is typically excessive because of externalities from bilateral transactions. The model provides both rationale and guidance for divestiture after a vertical merger.

Regulation Design in Insurance Markets

Dhruva Bhaskar
,
New York University
Andrew McClellan
,
University of Chicago
Evan Sadler
,
Columbia University

Abstract

Regulators often impose rules that constrain the behavior of market participants. We study the design of regulatory policy in an insurance market as an optimal delegation problem. A regulator restricts the menus of contracts an informed firm is permitted to offer, the firm offers a permitted menu to each consumer, and consumers choose contracts from offered menus. Under an ordering on consumer types and firm information, the regulator can fully leverage the firm's information by forcing the firm to offer specified additional options on each menu. Several extensions illustrate the applicability of our framework.

Matching with Multilateral Contracts

Nathan Yoder
,
University of Georgia

Abstract

In many environments, agents form agreements which are multilateral and/or have externalities. We show that stable outcomes exist in these environments when the irrelevance of rejected contracts condition survives aggregation, either across all agents or within two implicit sides of the market for whom contracts are substitutes. In settings where agents are strategically sophisticated, in the sense that they make correct conjectures about how other agents will choose from each set of contracts, we show this is ensured by a mild criterion on those conjectures. When each agent is strategically sophisticated about the behavior of all other agents, stable outcomes always exist: No conditions on preferences or market structure are necessary. Our characterization of these outcomes allows the application of matching theory to new settings, such as legislative bargaining or free trade agreement formation.

Discussant(s)
Victoria Marone
,
University of Texas-Austin
Juuso Toikka
,
University of Pennsylvania
Denis Shishkin
,
University of California-San Diego
Ravi Jagadeesan
,
Stanford University
JEL Classifications
  • D86 - Economics of Contract: Theory
  • D47 - Market Design