Clustering, Agency Costs and Operating Efficiency: Evidence from Nursing Home Chains

32 Pages Posted: 13 Mar 2011 Last revised: 11 Oct 2012

See all articles by Susan F. Lu

Susan F. Lu

Purdue University - Krannert School of Management

Gerard J. Wedig

University of Rochester - Simon Business School

Date Written: May 23, 2012

Abstract

Models of horizontal integration typically describe a tradeoff between multi-unit efficiencies and managerial agency costs. In extreme cases where managers cannot be incented contractually private ownership is thought to be the primary organizational substitute. In this paper we explore geographic clustering as an alternative strategy for controlling managerial agency costs within the chain form of organization. Clustering may facilitate scale efficiencies in both monitoring and supervision, resulting in reduced agency costs and improved application of the chain’s business model. We test this hypothesis in the nursing home industry, which is characterized by managerial contract costs resulting from multi-task models of production. We find that clustered nursing homes achieve higher quality, conditional on labor inputs and patient characteristics. The clustering effect is concentrated on reductions in minor/potential harm violations, which are difficult to observe without close monitoring. Several proxies for local organizational experience (“local learning”) cannot account for our findings, which are robust to a variety of alternative clustering definitions and competing explanations based on gaming behavior. Further tests indicate that chains endogenously pursue clustering, presumably to realize the benefits of improved quality outcomes.

Keywords: Clustering, Horizontal Integration, Monitoring, Health Care Markets

Suggested Citation

Lu, Susan Feng and Wedig, Gerard J., Clustering, Agency Costs and Operating Efficiency: Evidence from Nursing Home Chains (May 23, 2012). Available at SSRN: https://ssrn.com/abstract=1783054 or http://dx.doi.org/10.2139/ssrn.1783054

Susan Feng Lu (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://https://sites.google.com/site/susanluhome/home

Gerard J. Wedig

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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