Bargaining leverage increases hospital capital investment, and the effect is particularly pronounced at non-profit hospitals, which invest their monopoly profits in additional capital, according to a recent analysis published in the Journal of Industrial Economics.

From the paper:

Increased bargaining leverage is associated with large and statistically significant increases in the investment rate. A one standard deviation increase in a hospital’s bargaining position is associated with a 16 percentage point increase in its investment rates. Further addressing the possibility of unobserved confounders correlated with both a hospital’s bargaining leverage and investment suggest that the effect of a one standard deviation increase in leverage could lead to a 22 to 27 percentage point increase in capital investment.


As noted above, the majority of hospitals in the United States (and California) are non-profit organizations. This fact constrains their ability to return profits to stakeholders. However, the existing literature has shown both that they take advantage of bargaining leverage, and that they do not spend these rents on charity care. As a result, it is reasonable to expect that any possible monopoly rents are expended on either capital or labor. Thus, theory predicts that the impact of an increase in bargaining leverage on investment should be larger for non-profit hospitals than for-profit ones, who can return monopoly rents to their equity-holders. I test this prediction explicitly by estimating separate IV models for the two types of hospitals.

[…] The results are consistently supportive of the theory that non-profits invest their monopoly profits in additional capital. This can be seen in the fact that the coefficients on hospital WTP are larger and more precisely estimated for non-profit hospitals in sub-sample analyses. However, it should be noted that formal tests would not reject the null hypothesis that the different types of hospitals behave similarly.


The policy implications of these findings are interesting. If one accepts the conclusion that the incremental investment caused by an increase in bargaining leverage is not an optimal use of funds from the perspective of a hypothetical equity holder, then this implies that increases in bargaining leverage may be even worse in terms of total welfare than we might otherwise think. This is because, for any given loss in consumer welfare due to higher prices, the inability to efficiently extract rents leads to less of an increase in producer surplus. However, this loss may be counterbalanced to some extent if consumers derive positive utility from the incremental spending. Gauging the likely magnitudes of the different effects is something I hope to explore in future research.

Overall, my results show that firms choose to invest for many reasons, and that assuming a monotonic relationship with competition may be unwise. In light of the ongoing debate over the evolution of markets’ structures, this suggest a need for careful attention to the institutional details of different markets when considering the impact of competition.