Strategic Complements or Substitutes? The Case of Adopting Health Information Technology by U.S. Hospitals

Abstract This paper explores the adoption choice of electronic medical records by U.S. hospitals, which could exhibit strategic complements or substitutes. I find complementarities in adoption through a reduced-form analysis with instruments for unobserved market characteristics. I further develop a dynamic oligopoly model to allow for strategic timing incentives that are missing in the static model. Adopting a dominant local vendor could increase per period profits from adoption by 9.2% over choosing a marginal vendor. A counterfactual analysis suggests that an incentive program rewarding coordination, not just adoption, is more effective in achieving interoperability, especially before the widespread adoption of the technology.