The Allocation of Talent

Talent flows to where it is highly rewarded so if price and wage control limit rewards in one sector of the economy, talent will flow to the uncontrolled sector.  Mark Ramseyer looks at one implication:

The Japanese national health insurance
provides universal coverage. Necessarily, this entails a subsidy that
dramatically raises the demand for medical services. In the face of the
increased demand, the government suppresses costs by suppressing
prices. By combining extensive biographical (including income) data on
all 449 Tokyo cosmetic surgeons and a random sample of 499 other Tokyo
physicians, I explore the effect of this price suppression on the
allocation of talent and the development of expertise. Crucially, the
national health insurance does not cover services – like elective
cosmetic surgery – deemed medically superfluous. Facing price caps in
the covered sector but competitive prices in these superfluous sectors,
the most talented doctors should tend to shift into the superfluous
sectors and there to invest heavily in their expertise. I find evidence
consistent with this: cosmetic surgeons earn higher incomes than other
doctors; are more likely to have attended a national (generally more
selective) medical school; are more likely to have served on the
faculty of a medical school; and are more likely to be board-certified.
I speculate on the broader implications this phenomenon poses for the
allocation of talent in medicine.

Hat tip to Larry Ribstein at Ideoblog.

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