The effect of raising hospital quality on productivity: Evidence from system GMM estimation of hospital production function

Jongsay Yong | The University of Melbourne

This study investigates the relationship between hospital productivity and quality of care. We estimate a Cobb-Douglas hospital production function by using six years of hospital administrative data from the state of Victoria, Australia. Endogeneity of inputs and quality of care is accounted for using lagged variables via system GMM estimation (Blundell and Bond, 2000). We find that, after accounting for endogeneity, quality of care has a positive but not statistically significant effect on productivity of public hospitals in Victoria. On the whole, despite having limited number of observations, the system GMM approach works well for our data and can be a promising approach for estimating hospital production functions.