Quantifying the Impacts of Limited Supply: The Case of Nursing Homes
International Economic Review, vol. 56(4), pp. 1291-1322, 2015
55 Pages Posted: 9 May 2009 Last revised: 21 Apr 2016
Date Written: June 12, 2014
In this paper, we develop an empirical demand model and an estimation strategy that can account for excess demand, and the unobserved component of product quality. Our methodology allows us to quantify the extent of rationing, price and quality elasticities, and shed light on the potential welfare gain/loss if we try to fulfill all the rationed demand. We apply our framework to study the Wisconsin nursing home market in 1999, which has been thought to face two main problems: limited access/rationing and low quality. The estimated model suggests that nearly 19% of elderly who qualified for Medicaid were rationed out, and around 26% of Medicaid nursing home patients could not enter their first-choice nursing homes. However, the net social welfare gain of fulfilling all the nursing home demand maybe small, mainly because the welfare gain to Medicaid patients could be largely offset by the increase in Medicaid expenditures. We also find that on average 1% increase in quality would crowd out 3.2% Medicaid patients in nursing homes with binding capacity constraints.
Keywords: rationing, excess demand, capacity constraints, demand estimation, nursing homes, unobserved quality
JEL Classification: C15, C35, D45, I11, I18
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