Productivity Variation and Input Misallocation: Evidence from Hospitals

There are widespread differences in total factor productivity across producers in the U.S. and around the world. To explain these variations, we use simple economic insights to test the extent to which U.S. hospitals misallocate inputs by examining if the marginal return to specific inputs, conditional on total cost, differs from zero. This test does not require knowledge of the production function or specific input prices. We find large and systematic deviations from efficiency: Holding spending fixed, misallocation is estimated to account for as much as 3.3 percentage points (11% of mortality) across hospitals, and explains roughly 25% of hospital productivity variation. These results suggest large gains from improving how—not how much—hospitals spend.

This is a joint work with Amitabh Chandra and Carrie Colla.