We analyze the causal impact of competition on managerial quality (and hospital performance). To address the endogeneity of market structure we analyze the English public hospital sector where entry and exit are controlled by the central government. Because closing hospitals in
areas where the governing party is expecting a tight election race (“marginals”) is rare due to the
fear of electoral defeat, we can use political contestability as an instrumental variable for the number
of hospitals in a geographical area. We 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). We find that higher competition is positively correlated with
management quality, and this relationship strengthens when we instrument the number of rival
hospitals with whether these rivals are located in marginal districts. Adding a rival hospital increases
management quality by 0.4 standard deviations and increases in-hospital survival rate from
emergency heart attacks by 8.8%. We confirm the validity of our IV strategy by conditioning on own
hospital marginality which controls for any “hidden policies” that could be used in marginals
districts to improve hospital management (thus identifying purely off the marginality of rival
hospitals). Further, we successfully run a placebo test of marginality on schools, a public service
where the central government has no formal influence. |
