Financial Incentives and Competitive Pressure: The Case of the Hospital Industry

Abstract

In the late 2000s, a regulatory reform dramatically strengthened the incentives of French nonprofit hospitals to attract patients. Exploiting exhaustive data for surgery treatments and modeling hospitals as supplying utility to patients, we show that increased competitive pressure on nonprofit hospitals caused them to perform more procedures but did not inflate overall activity. Although they have gained market shares, nonprofit hospitals have been significantly worse off after the reform. To adjust to stronger financial incentives, they incurred an additional effort (pecuniary and non-pecuniary costs) equivalent to about a quarter of their annual revenue.