Message For The NHS – It’s Competition Itself Which Raises Productivity

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As we all know arguing that there should be competition within the National Health Service causes maiden aunts to drop their pearls. But efficient organisations are built upon cooperation dahling!

The thing being, no, not really. Competition is, in fact, a decision about who you are going to cooperate with. But rather more importantly we know that non-competition leads to inefficiency. The only thing we’ve been pondering these years is what, exactly, is the route by which we gain the efficiency?

The correlation between productivity and competition is an oft–observed but ill–understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I find no evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semi-parametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.

Well, here we go then. It’s the competition itself which produces the efficiency. Thus, to make the NHS efficient we must have competition.