TY  - JOUR
AU  - Cawley,John
AU  - Grabowski,David C.
AU  - Hirth,Richard A.
TI  - Factor Substitution and Unobserved Factor Quality in Nursing Homes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10465
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10465
L1  - http://www.nber.org/papers/w10465.pdf
N1  - Author contact info:
John Cawley
3M24 MVR Hall
Department of Policy Analysis and Management
and Department of Economics
Cornell University
Ithaca, NY  14853
Tel: 607/255-0952
Fax: 607/255-4071
E-Mail: jhc38@cornell.edu

David Grabowski
Harvard University
Department of Health Care Policy
Harvard Medical School
180 Longwood Avenue
Boston, MA 02115
E-Mail: grabowski@med.harvard.edu
AB  - This paper studies factor substitution in one important sector: the nursing home industry. Specifically, we measure the extent to which nursing homes substitute materials for labor when labor becomes relatively more expensive. From a policy perspective, factor substitution in this market is important because materials-intensive methods of care are associated with greater risks of morbidity and mortality among nursing home residents. Studying longitudinal data from 1991-1998 on nearly every nursing home in the United States, we use the method of instrumental variables (IV) to address the potential endogeneity of nursing home wages. The results from the IV models are consistent with the theory of factor substitution: higher nursing home wages are associated with lower staffing, greater use of materials (specifically, physical restraints), and a higher proportion of residents with pressure ulcers. A comparison of OLS and IV results suggests that empirical studies of factor substitution should take into account unobserved heterogeneity in factor quality.
ER  -