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

  • Kolstad, Jonathan T.
  • Cutler, David M.
  • Huckman, Robert Steven
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    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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    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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    Web page: http://www.economics.harvard.edu/

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    1. 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.
    2. Huckman, Robert S., 2006. "Hospital integration and vertical consolidation: An analysis of acquisitions in New York State," Journal of Health Economics, Elsevier, vol. 25(1), pages 58-80, January.
    3. 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.
    4. 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.
    5. 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.
    6. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    7. Martin Gaynor, . "What Do We Know About Competition and Quality in Health Care Markets?," GSIA Working Papers 2006-E62, Carnegie Mellon University, Tepper School of Business.
    8. Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
    9. 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.
    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. 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.
    12. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2003. "Is More Information Better? The Effects of "Report Cards" on Health Care Providers," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 555-588, June.
    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.
    14. 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.
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