Working Papers

Quantifying the Impacts of Limited Supply: The Case of Nursing Homes

Andrew T. Ching, Fumiko Hayashi, Hui Wang

This paper develops a new estimation method that accounts for excess demand and the unobserved component of product quality. We apply our method to study the Wisconsin nursing home market in 1999, and find that nearly 20% of elderly qualified for Medicaid were rationed out. However, our counterfactual experiment shows that the net welfare gain of fulfilling all nursing home demands may be small, because the welfare gain to Medicaid patients could be largely offset by the increase in Medicaid expenditures. We also find that a 1% increase in quality would crowd out 3.2% Medicaid patients in binding nursing homes.

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Paper Keywords

rationing, excess demand, capacity constraints, demand estimation, nursing homes, unobserved quality