Input and Technology Choices in Regulated Industries: Evidence From the Health Care Sector

Daron Acemoglu and Amy Finkelstein

No 12254, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the implications of regulatory change for the input mix and technology choices of regulated industries. We present a simple neoclassical framework that emphasizes the change in relative factor prices associated with the regulatory change from full cost to partial cost reimbursement, and investigate how this affects firms' technology choices through substitution of (capital embodied) technologies for tasks previously performed by labor. We examine these implications empirically by studying the change from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform, which increased the relative price of labor faced by U.S. hospitals. Using the interaction of hospitals' pre-PPS Medicare share of patient days with the introduction of these regulatory changes, we document a substantial increase in capital-labor ratios and a large decline in labor inputs associated with PPS. Most interestingly, we find that the PPS reform seems to have encouraged the adoption of a range of new medical technologies. We also show that the reform was associated with an increase in the skill composition of these hospitals, which is consistent with technology-skill or capital-skill complementarities.

JEL-codes: H51 I18 L50 L51 O31 O33 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-com, nep-hea, nep-ino, nep-pbe and nep-reg
Note: EH LS PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Daron Acemoglu & Amy Finkelstein, 2008. "Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 837-880, October.

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Journal Article: Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector (2008)
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