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Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery

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  • Cutler, David M.
  • Huckman, Robert Steven
  • Kolstad, Jonathan T.
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    Abstract

    Prior studies suggest that, with elastically supplied inputs, free entry may lead to an inefficiently high number of firms in equilibrium. Under input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for cardiac surgery in the state. We show that entry led to a redistribution of surgeries to higher-quality this entry was approximately welfare neutral.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/5344226/Input%20constraints.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 5344226.

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    Date of creation: 2010
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    Publication status: Published in American Economic Journal: Economic Policy
    Handle: RePEc:hrv:faseco:5344226

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    1. Cutler, David M. & Huckman, Robert S., 2003. "Technological development and medical productivity: the diffusion of angioplasty in New York state," Journal of Health Economics, Elsevier, vol. 22(2), pages 187-217, March.
    2. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 397-420, Autumn.
    3. Robert S. Huckman, 2005. "Hospital Integration and Vertical Consolidation: An Analysis of Acquisitions in New York State," NBER Working Papers 11379, National Bureau of Economic Research, Inc.
    4. Martin Gaynor, 2006. "What Do We Know About Competition and Quality in Health Care Markets?," NBER Working Papers 12301, National Bureau of Economic Research, Inc.
    5. Robert S. Huckman & Gary P. Pisano, 2006. "The Firm Specificity of Individual Performance: Evidence from Cardiac Surgery," Management Science, INFORMS, vol. 52(4), pages 473-488, April.
    6. Jean M. Abraham & Martin S. Gaynor & William B. Vogt, 2005. "Entry and Competition in Local Hospital Markets," NBER Working Papers 11649, National Bureau of Economic Research, Inc.
    7. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
    8. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    9. Chernew, Michael & Gowrisankaran, Gautam & Fendrick, A. Mark, 2002. "Payer type and the returns to bypass surgery: evidence from hospital entry behavior," Journal of Health Economics, Elsevier, vol. 21(3), pages 451-474, May.
    10. Zeckhauser, Richard, 1970. "Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives," Journal of Economic Theory, Elsevier, vol. 2(1), pages 10-26, March.
    11. Mark V. Pauly, 2004. "Competition in Medical Services and the Quality of Care: Concepts and History," International Journal of Health Care Finance and Economics, Springer, vol. 4(2), pages 113-130, 06.
    12. Vivian Ho, 2006. "Does certificate of need affect cardiac outcomes and costs?," International Journal of Health Care Finance and Economics, Springer, vol. 6(4), pages 300-324, December.
    13. Martin Gaynor & Harald Seider & William B. Vogt, 2005. "The Volume–Outcome Effect, Scale Economies, and Learning-by-Doing," American Economic Review, American Economic Association, vol. 95(2), pages 243-247, May.
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    Cited by:
    1. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
    2. Zack Cooper & Stephen Gibbons & Simon Jones & Alistair McGuire, 2012. "Does Competition Improve Public Hospitals' Efficiency? Evidence from a Quasi-Experiment in the English National Health Service," CEP Discussion Papers dp1125, Centre for Economic Performance, LSE.
    3. Suhui Li & Avi Dor, 2013. "How Do Hospitals Respond to Market Entry? Evidence from A Deregulated Market for Cardiac Revascularization," NBER Working Papers 18926, National Bureau of Economic Research, Inc.

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