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

  • David M. Cutler


    (Harvard University)

  • Robert S. Huckman


    (Harvard Business School, Technology and Operations Management Unit)

  • Jonathan T. Kolstad


    (The Wharton School, University of Pennsylvania)

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 surgeons and that this entry was approximately welfare neutral.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-011.

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Length: 43 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:hbs:wpaper:10-011
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  1. 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.
  2. Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
  3. Martin Gaynor, 2006. "What Do We know About Competition and Quality in Health Care Markets?," The Centre for Market and Public Organisation 06/151, Department of Economics, University of Bristol, UK.
  4. David M. Cutler & Robert S. Huckman, 2002. "Technological Development and Medical Productivity: The Diffusion of Angioplasty in New York State," NBER Working Papers 9311, National Bureau of Economic Research, Inc.
  5. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Kevin M. Murphy & Robert H. Topel, 2005. "The Value of Health and Longevity," NBER Working Papers 11405, National Bureau of Economic Research, Inc.
  7. Jean Abraham & Martin Gaynor & William B. Vogt, 2005. "Entry and Competition in Local Hospital Markets," GSIA Working Papers 1999-E32, Carnegie Mellon University, Tepper School of Business.
  8. 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.
  9. 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.
  10. Roger W. Koenker & Martin K. Perry, 1981. "Product Differentiation, Monopolistic Competition, and Public Policy," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 217-231, Spring.
  11. 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.
  12. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  13. 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.
  14. Cutler, David & Huckman, Robert, 2003. "Technological Development and Medical Productivity: The Diffusion of Angioplasty in New York State," Scholarly Articles 2664291, Harvard University Department of Economics.
  15. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2002. "Is More Information Better? The Effects of 'Report Cards' on Health Care Providers," NBER Working Papers 8697, National Bureau of Economic Research, Inc.
  16. 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.
  17. Burns, Lawton R. & Wholey, Douglas R., 1992. "The impact of physician characteristics in conditional choice models for hospital care," Journal of Health Economics, Elsevier, vol. 11(1), pages 43-62, May.
  18. 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.
  19. 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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