Quantifying the Impacts of Limited Supply: The Case of Nursing Homes

International Economic Review, vol. 56(4), pp. 1291-1322, 2015

Rotman School of Management Working Paper No. 1401728

55 Pages Posted: 9 May 2009 Last revised: 21 Apr 2016

See all articles by Andrew T. Ching

Andrew T. Ching

Johns Hopkins University - Carey Business School

Fumiko Hayashi

Federal Reserve Bank of Kansas City

Hui Wang

Peking University - Guanghua School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2014

Abstract

In this paper, we develop an empirical demand model and an estimation strategy that can account for excess demand, and the unobserved component of product quality. Our methodology allows us to quantify the extent of rationing, price and quality elasticities, and shed light on the potential welfare gain/loss if we try to fulfill all the rationed demand. We apply our framework to study the Wisconsin nursing home market in 1999, which has been thought to face two main problems: limited access/rationing and low quality. The estimated model suggests that nearly 19% of elderly who qualified for Medicaid were rationed out, and around 26% of Medicaid nursing home patients could not enter their first-choice nursing homes. However, the net social welfare gain of fulfilling all the nursing home demand maybe small, mainly because the welfare gain to Medicaid patients could be largely offset by the increase in Medicaid expenditures. We also find that on average 1% increase in quality would crowd out 3.2% Medicaid patients in nursing homes with binding capacity constraints.

Keywords: rationing, excess demand, capacity constraints, demand estimation, nursing homes, unobserved quality

JEL Classification: C15, C35, D45, I11, I18

Suggested Citation

Ching, Andrew T. and Hayashi, Fumiko and Wang, Hui, Quantifying the Impacts of Limited Supply: The Case of Nursing Homes (June 12, 2014). International Economic Review, vol. 56(4), pp. 1291-1322, 2015, Rotman School of Management Working Paper No. 1401728, Available at SSRN: https://ssrn.com/abstract=1401728 or http://dx.doi.org/10.2139/ssrn.1401728

Andrew T. Ching (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Fumiko Hayashi

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Hui Wang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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