Ownership, Asymmetric Information, and Quality of Care for the Elderly: Evidence from US Nursing Homes During the COVID-19 Pandemic

A common cause of market failures is asymmetric information. For this reason, the reliance on market incentives and signals requires that quality of goods and services is properly observable and verifiable. This requirement is hard to meet in the case of credence goods, including most social services, which is a well-known reason for caution evaluating the providers of these services. In such environment, nonprofit providers can offer additional quality assurance compared to for-profit entities. When quality becomes better observable and verifiable, and hence could earn a market premium, market incentives are closer aligned with social welfare, and the quality gap expected between nonprofit and for-profit provision is likely to narrow. We explore this conjecture theoretically and empirically, using in the empirical part the case of US nursing homes during the COVID-19 pandemic. The pandemic supplied new tangible and publicly observable nursing home performance measures such as infection and death rates among residents. These measures could serve as care quality indicators, revealing aspects and attributes of the nursing home care that remained hidden before the pandemic. The data reveal significant initial gaps between for-profit and nonprofit nursing homes in COVID-19 infection rates. However, in the ensuing catching-up process triggered by increased transparency, these gaps steadily declined, eventually leading to statistical parity between two types of ownership. We explore the role of local market structure in the adjustment of nursing home industry to the pandemic; retroactively evaluate the reliability of the official ranking system in predicting nursing homes’ performance; and look for evidence of sustainable learning-by-doing effect of the pandemic.