Driving a Bargain: Negotiation Skill and Price Dispersion
*Joint with UMass Health Economics WIPS seminar series
Abstract
We develop a measure of managers' negotiation skill based on their vehicle purchase price and connect it to observed negotiated prices in business-to-business contracting. Using proprietary data on insurance claims between hospitals and private insurers, we find that hospital managers with higher negotiation skill achieve better outcomes, both for the average price per service and for identical procedures at the same hospital. Evidence from both management turnovers for natural causes as well as shocks to insurer bargaining position supports a causal interpretation. Lastly, we structurally estimate a model to quantify the impact of managers' personal negotiation skill on hospital bargaining power. Counterfactual simulations imply that heterogeneity in managers' negotiation skills account for over 5% of the price dispersion observed in the data.
Tong Liu is the Judy C. Lewent (1972) and Mark Shapiro Career Development Assistant Professor of Finance at the MIT Sloan School of Management. Tong’s research focuses on corporate finance, entrepreneurial finance, and healthcare finance. His recent work uses a broad set of empirical methods and structural techniques to explore questions related to the welfare impacts of private equity buyouts and venture capital investments, market frictions that affect startup innovation, and measures of corporate investment opportunities. He received his PhD in finance from the Wharton School at the University of Pennsylvania. Prior to that, he received an MA in economics from Peking University and a BA in mathematical economics and finance from Central University of Finance and Economics.
