Quality-Adjusted Cost Functions and Policy Evaluation in the Nursing Home Industry
Proper evaluation of cost-quality trade-offs inherent in regulatory policy requires identifying the structure of production from the behavioral response of quality to the policy change. However, estimating the structure of production with endogenous quality is difficult because of both measurement problems and data availability. The authors develop a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality. Using this method, they estimate that a quality-adjusted cost function for nursing homes treating quality as exogenous yields seriously misleading estimates of marginal cost and economies of scale. Copyright 1992 by University of Chicago Press.
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