Does Market Power Encourage or Discourage Investment? Evidence from the Hospital Market
68 Pages Posted: 30 Oct 2015 Last revised: 3 Jan 2020
Date Written: October 28, 2015
Does market power encourage or discourage investment? This is an open question due to theoretical ambiguity and empirical difficulties. The answer to this question is particularly important in the hospital market, where market power has increased dramatically since the 1990s. To answer this, we exploit an investment tax shock and data on the universe of US hospitals. We find a negative relationship between competition and investment. In particular, hospitals in concentrated markets increased investment by 6.4% ($2.7 million) more in response to tax incentives than firms in competitive markets. Further, firms' investment responses monotonically increased with market concentration.
Keywords: Market concentration, oligopoly and other imperfect markets, nonprofit, corporate investment, business taxes, hospitals
JEL Classification: L13, L33, G11, G31, G38, H25
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