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This paper studies the link between competition and technical efficiency of public hospitals in the state of Victoria, Australia. It finds a positive relationship between efficiency and competition as measured by the Hirschman-Herfindahl Index (HHI) and a negative relationship when the number of competing private hospitals is used instead of HHI. It also finds that whether or not quality is treated as an endogenous output variable influences the statistical estimates of the link between efficiency and competition. The findings point to possibly undesirable resource allocation effects when public hospitals are made to compete with a large number of private hospitals.
