Productivity Program Meeting

December 10, 2010 -
Ernst R. Berndt of MIT, Organizer

David M. Cutler, Harvard University and NBER

Where Are the Health Care Entrepreneurs? The Failure of Organizational Innovation in Health Care (NBER Working Paper No. 16030)

Medical care is characterized by enormous inefficiency. Costs are higher and outcomes worse than almost all analyses of the industry suggest should occur. In other industries characterized by inefficiency, efficient firms expand to take over the market, or new firms enter to eliminate inefficiencies. This has not happened in medical care, however. Cutler explores the reasons for this failure of innovation. He identifies two factors as being particularly important in organizational stagnation: public insurance programs that are oriented to volume of care and not value, and inadequate information about quality of care.

David Meltzer, University of Chicago and NBER, and Jeanette Chung, University of Chicago

Coordination, Switching Costs, and the Division of Labor in General Medicine: An Economic Explanation for the Emergence of Hospitalists in the United States (NBER Working Paper No. 16040)

General medical care in the United States historically has been provided by physicians who care for their patients in both ambulatory and hospital settings. Now care increasingly is divided between physicians specializing in hospital care (hospitalists) and ambulatory-based care primary care physicians. Meltzer and Chung develop and find strong empirical support for a theoretical model of the division of labor in general medicine that views the use of hospitalists as balancing the costs of coordinating care across physicians in the hospitalist model against physicians' costs switching between ambulatory and hospital settings in the traditional model. The findings suggest opportunities to improve care.

Nicholas Bloom, Stanford University and NBER; Carol Propper, University of Bristol; Stephan Seiler, London School of Economics; and John Van Reenen, London School of Economics and NBER

The Impact of Competition on Management Practices in Public Hospitals (NBER Working Paper No. 16032)

Bloom, Propper, Seiler, and Van Reenen examine the causal impact of competition on management quality. They analyze the hospital sector, where geographic proximity is a key determinant of competition, and English public hospitals, where political competition can be used to construct instrumental variables for market structure. Almost all major English hospitals are government run, so closing hospitals in areas where the governing party has a small majority is rare because of fear of electoral punishment. The researchers find that management quality -- measured using a new survey tool -- is strongly correlated with financial and clinical outcomes, such as survival rates from emergency heart attack admissions (AMI). More importantly, higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when the authors instrument the number of local hospitals with local political competition. Adding another rival hospital increases the index of management quality by one third of a standard deviation and leads to a 10.7 percent reduction in heart-attack mortality rates.

Diego A. Comin, Harvard University and NBER, and Bart Hobijn, Federal Reserve Bank of San Francisco

Technology Diffusion and Postwar Growth (NBER Working Paper No. 16378)

In the aftermath of World War II, the world's economies exhibited very different rates of economic recovery. Comin and Hobijn provide evidence that those countries that caught up the most with the United States in the postwar period also saw an acceleration in the speed of adoption of new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. The authors interpret this as supportive of the interpretation that technology transfers from the United States to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.

Timothy F. Bresnahan, Stanford University and NBER; Shane Greenstein, Northwestern University and NBER; and Rebecca Henderson, Harvard University and NBER
Schumpeterian Competition and Diseconomies of Scope; Illustrations from the Histories of Microsoft and IBM

Bresnahan, Greenstein, and Henderson address a longstanding question about the causes of creative destruction. Dominant incumbent firms, long successful in an existing technology, often are much less successful in new technological eras. This is puzzling, because a cursory analysis would suggest that incumbent firms have the potential to take advantage of economies of scope across new and old lines of business. And, if economies of scope are unavailable, those firms can simply reproduce entrant behavior by creating a "firm within a firm." Two broad streams of explanation for incumbent failure apply n these circumstances: one posits that incumbents fear cannibalization in the market place, and so under-invest in the new technology. The second suggests that incumbent firms develop organizational capabilities and cognitive frames that make them slow to "see" new opportunities, and that make it difficult to respond effectively once the new opportunity is identified. Bresnahan, Greenstein, and Henderson draw on two of the most important historical episodes in the history of the computing industry, the introduction of the PC and the browser, to develop a third hypothesis. Both IBM and Microsoft, having been extremely successful in an old technology, came to have grave difficulties competing in the new, despite some dramatic early success. The authors suggest that these difficulties do not arise from cannibalization concerns nor from inherited cognitive frames. Instead, they reflect diseconomies of scope rooted in assets that are necessarily shared across both businesses. The authors show that both Microsoft and IBM were initially very successful in creating free standing business units that could compete with entrants on their own terms, but that as the new businesses grew, the need to share key firm-level assets imposed significant costs on both businesses and created severe organizational conflict. In IBM and Microsoft's case this conflict eventually led to control over the new business being given to the old, and in both cases that effectively crippled the new business.

Alberto Cavallo, MIT, and Roberto Rigobon, MIT and NBER
The Distribution of the Size of Price Changes

Cavallo and Rigobon formally test for the number of modes in the price-change distribution of 32 supermarkets, spanning 23 countries and five continents. They present results for three modality tests: the two best-known tests in the statistical literature -- Hartigan's Dip and Silverman's Bandwith -- and a test designed in this paper, called the "Proportional Mass" test. Three important results emerge. First, when the traditional tests are used, the unimodality around zero is rejected in about 90 percent of the establishments. When the Proportional Mass test, which is more conservative than the first two, is used, unimodality is still rejected in two thirds of the supermarkets. There is important heterogeneity across countries: the United States, UK, and Uruguay are the most "unimodal" while the other countries in the sample exhibit significant bi-modality. Second, if the authors center their test on the largest mode {as opposed to zero) they have few rejections of unimodality. Finally, the rejection of unimodality changes through time and with the level of inflation. In countries where there is high inflation, the distribution is unimodal around a positive value. In those countries, when inflation drops -- which happened almost everywhere during the recent financial recession -- unimodality starts to disappear again. These results offer new stylized facts that theoretical models of price stickiness need to match. The authors perform a simple simulation exercise at the end using the model by Alvarez et al. (2010) and applying their PM test of unimodality to the model's distributions.