DP14292 Who benefits when inertia is reduced? Competition, quality and returns to skill in health care markets

Author(s):	Sebastian Fleitas
Publication Date:	January 2020
Keyword(s):	Competition, inertia, Quality, Returns to skill
JEL(s):	I13, I18, J31, J44, L15
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14292

Increased competition creates incentives for health-care providers to improve quality by incorporating better inputs, like higher-skill physicians. However, because the supply of high-skill physicians is relatively inelastic in the short run, increases in competition may lead only to increases in returns to skill. I leverage a reform in Uruguay that increased competition among completely vertically integrated providers by reducing lock-in of consumers. Using administrative data on wages and hours and a measure of physicians' skills based on test scores from medical school, I show that increased competition increased the returns to skill without strong evidence of an increase in quality.