The Impact of Competition on Investment: Evidence From California Hospitals

Nathan Wilson ()

Journal of Industrial Economics, 2021, vol. 69, issue 1, 1-32

Abstract: I examine the relationship between bargaining leverage and capital investment using data on California’s hospital markets. I find evidence that investment increases with bargaining leverage; a hospital whose bargaining position improves by one standard deviation will increase its investment rate by 16 percentage points. A positive causal relationship between bargaining leverage and investment fits the institutional details of the health care sector, where many firms have non‐profit tax status, making it difficult to return monopoly rents to shareholders. Consistent with this explanation, I find that non‐profit hospitals with bargaining leverage invest more than for‐profit ones, all else equal. I do not find strong evidence that financing constraints matter disproportionately for hospitals operating in more competitive markets, supporting the hypothesis that the incremental investment may not be socially efficient.

Date: 2021
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