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Supplier Induced Demand Reconsidered

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journal contribution
posted on 2017-06-05, 06:49 authored by Richardson, Jeff, Peacock, Stuart
This paper reconsiders the evidence and argument supporting the theory of Supplier Induced Demand (SID) in the light of recent criticisms and particularly those presented at the 1997 Health Economists Conference by Doessel (1997). The paper commences by documenting the major facts of the health sector which any satisfactory theory - SID or orthodox - must address. A theory of SID is outlined which differs in some importance respects from the theory presented in most text books of health economics. Criticisms of the use of cross-sectional data are evaluated and the model used by Richardson (1981) and by Doessel (1997) are re-estimated with cross-sectional data from 187 statistical sub-divisions. The rates at which procedures are given to hospital patients following an emergency admission for acute myocardial infarction are then presented as a discriminating test of the relative importance of patients and doctors in decision-making. It is concluded that SID provides a coherent explanation of the major facts in the health sector in a way that orthodox theory does not. It is suggested that the continued debate in the economic literature is attributable to the application of different criteria for the acceptance and rejection of new theories. A distinction is drawn between pragmatic and orthodox theorists and the criteria each is likely to apply for the revision of theory in the face of discordant observations.


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Centre for Health Program Evaluation

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