Market Size and Trade in Medical Services

We’ve written a new paper: “Market Size and Trade in Medical Services” with Josh Gottlieb, Maya Lozinski, and Pauline Mourot.

There’s a long-running discussion in health policy about “spatial mismatch”: are doctors and clinics too concentrated in big cities? Our paper emphasizes that you need to quantify the trade-off between local increasing returns and trade costs to answer this question. If the division of labor is limited by the extent of the market, there’s an upside to geographically concentrating production. The downside depends on how difficult it is for patients to travel.

See the paper for the gory details of how we use gravity regressions to estimate the distance elasticity and each region’s service quality and then estimate the regional production function for medical services. Or check out the less technical summary or the podcast interview, courtesy of the Becker Friedman Institute.

One of the heartening lessons for trade economists is that our conventional tools, which have been overwhelmingly developed for and applied to trade in manufactured goods, do a pretty good job of describing medical services. The economic logic and mechanisms are familiar, even if the magnitudes are different in important ways. I’ve learned a lot from my first foray into health economics, and it’s also been a lot of fun to apply classic insights from international and urban economics to a really important service sector.