Jonathan Kolstad

Jonathan Kolstad

Associate Professor, and Egon & Joan Von Kaschnitz Distinguished Professorship, Haas School of Business, UC Berkeley

Dissertation Title:  "Essays on Information, Competition and Quality in Health Care Provider Markets"

In the first chapter, I consider the welfare economics of firm entry when input supply is not perfectly elastic. Prior studies suggest that with elastically supplied inputs, free entry is likely to lead to an inefficiently high number of firms as entrants “steal” business from incumbents. When firms face input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopsonistic firms underuse these inputs when entry is constrained. I assess these predictions empirically by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for coronary artery bypass graft (CABG) surgery in the state. Within a few years after the repeal of CON legislation, the number of CABG facilities increased 46 percent. Consistent with theory, I show that entry led to a redistribution of surgeries from lower- to higher-quality surgeons. Under a reasonable set of assumptions, I find that the value of the improved outcomes due to this redistribution offset between 42 and 100 percent of the additional fixed costs incurred by new entrants.

In the second chapter I consider a model of suppliers who are motivated by a desire to perform well in addition to profit. If profit maximization is the only objective of a firm, new information about quality should affect firm behavior only through its effects on market demand. In the alternate model, performance data can alter both pecuniary incentives (i.e. extrinsic motivation) and incentives unrelated to profit (i.e. intrinsic motivation). The introduction of quality “report cards” for cardiac surgery in Pennsylvania provides an empirical setting to test for an effect of new information on quality (mortality) and to isolate the relative role of extrinsic (demand side) and intrinsic (supply side) incentives in determining surgeon response to new information. Using a structural demand system, I estimate the profit incentives facing each surgeon from the introduction of report cards. Extrinsic incentives due to quality reporting led to a .09 percentage point (three percent) decline in mortality. Consistent with a mixed model of objectives, information on performance that was new to surgeons and unrelated to patient demand led to an intrinsic response three times as large as surgeon response to profit incentives.

The third chapter measures the response of consumers to different information sources when choosing health care providers. In the absence of public “report cards” consumers can rely on market based mechanisms such as provider reputation, private reporting (e.g. US News and World Report) or the advice of a referring physician agent or their insurance plan. Such market based learning may be a substitute or complement for publicly released quality information. I estimate a model of consumer demand for surgeon quality (mortality) that integrates unobserved insurance network constraints, agency, U.S. News and World Report rankings and proxies for hospital reputation. Prior to formal information release, market based learning explains almost all of the consumer response to surgeon quality. After public information release demand for high quality surgeons increases relatively. I find that market based learning either substitutes for or is unaffected by public reporting. In particular, a U.S. News and World report ranking reduces consumer response to surgeon quality. Hospital reputation and agency show little differential impact on demand for quality after public reporting.



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