Regulation and Diffusion of Innovation Under Information Spillovers: The Case of New Medical Procedures

Working Paper
Working paper available here. BibTeX citation available here.

Abstract: The value of innovative technologies is often initially uncertain, forcing policymakers to weigh the potential benefit of promoting a valuable innovation against the cost of encouraging adoption of an ineffective one. This tradeoff is further complicated when wider adoption can reduce uncertainty by revealing information about the innovation’s effectiveness. I examine these issues in the context of new medical procedures, where the value of each innovation is highly uncertain and Medicare contractors must decide whether to reimburse health care providers for the procedure. Using geographic variation in the coverage rules issued by these contractors, I show that these rules significantly influence providers’ adoption of new procedures. Next, I leverage the resulting variation in the incentives of providers to adopt new procedures to identify information spillovers from individual providers’ experiences with the new procedures. I present evidence that social learning is an important determinant of the spread of innovation in this context. Finally, in light of this evidence, I estimate a structural model of innovation adoption and provider learning to determine the optimal Medicare coverage policy for new procedures. In counterfactual simulations, I find that increasing coverage for new procedures would result in large welfare gains.