Proper evaluation of cost-quality trade-offs inherent in regulatory policy requires identifying the structure of production from the behavioral response of quality to the policy change. However, estimating the structure of production with endogenous quality is difficult because of both measurement problems and data availability. We develop a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality. Using this method, we estimate that a quality-adjusted cost function for nursing homes treating quality as exogenous yields seriously misleading estimates of marginal cost and economies of scale. We then used the parameter estimates to evaluate the cost-quality trade-off in nursing home regulatory policy.

The Heckscher-Ohlin-Vanek (HOV) model of factor service trade is a mainstay of international economics. Empirically, though, it is a flop. This warrants a new approach. We test the HOV model with international and Japanese regional data. The strict HOV model performs poorly because it cannot explain the international location of production. Restricting the sample to Japanese regions provides no help, inter alia giving rise to what Daniel Trefler calls the "mystery of the missing trade." However, when we relax the assumption of universal factor price equalization, results improve dramatically. In sum, the HOV model performs remarkably well.