Demand for Quality in the Presence of Information Frictions : Evidence from the Nursing Home Market

This paper studies consumers' demand for quality in the nursing home market, where information frictions are a source of concern. Using administrative data on the universe of nursing home residents, I estimate quality of nursing homes in California, and use these estimates as inputs into a structural demand model. I find substantial variation in nursing home quality: one standard deviation higher quality is associated with 2 percent lower risk-adjusted 90-day mortality rate. Yet, despite the high stakes for residents, average demand for quality is very low, even after accounting for unobserved supply-side constraints arising from selective admissions practices by nursing homes. Patterns of demand heterogeneity highlight information frictions as a major reason for this low demand: residents who were younger, highly educated, free from dementia, and who made their choices after the introduction of the star rating system were more responsive to quality. Counterfactual simulations based on estimates of the structural demand model and a competing risks model suggest that eliminating information frictions can reduce deaths by at least 8 to 28 percent, and potentially even more if supply side responses are considered