IFS Seminar - Jonathan Skinner (The Dartmouth Institute)

There are widespread differences in productivity in the United States and around the world in industries as disparate as manufacturing, banking, and health care. We use simple economics to devise a general test for misallocation in input choices - the underuse of effective inputs and overuse of ineffective ones - to explain variations in productivity. Misallocation implies that conditional on total input use, the return to using a particular input is not zero (a positive return implies underuse, and a negative return implies overuse). We measure misallocation across hospitals, where inputs and outputs are better measured than in other industries. Applying our test to a sample of 1.6 million Medicare beneficiaries with heart attacks (of which 436 thousand were admitted by ambulance), we reject the hypothesis of productive efficiency; moving a patient from a 10th percentile to a 90th percentile hospital with respect to misallocation, holding spending constant, is predicted to increase survival by 3.1 percentage points. With misallocation accounting for as much as 25 percent of the variation in hospital productivity, our results suggest that how the money is spent, rather than how much money is spent, is central to understanding productivity differences both in health care, and in the rest of the economy.