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

63 Pages Posted: 1 Jun 2006 Last revised: 19 Sep 2014

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2006

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 a%uFB00ects firms%u2019 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%u2019 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.

Suggested Citation

Acemoglu, Daron and Finkelstein, Amy, Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector (May 2006). NBER Working Paper No. w12254, Available at SSRN: https://ssrn.com/abstract=905511

Daron Acemoglu (Contact Author)

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Amy Finkelstein

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