Answer to Question #91830 in Microeconomics for Harry Kasu

Question

Why do some analysts think shared savings are weaker incentives than bearing downside risk for failing to meet specific spending targets? Explain.

Answer 1

The shared savings always offer risks without benefits.In most cases the provider is rewarded when they realize savings but at the same time not penalized otherwise.In this regard it is assumed that no additional cost is required to realize savings that attracts bonuses.Consequently there is no guarantee that the additional cost which is actually incurred in realizing savings will be fully covered by the payments offered.

Additionally, shared savings reward high spenders instead of great performers.The communities wasting more resources qualify for the bonuses since they require little effort to realize more saving than the saving communities who require more investments to save further and qualify for a smaller payment that cannot cover the costs incurred.