Why is Distance Important for Hospital Choice? Separating Home Bias From Transport Costs *

In retail and health care markets, demand declines with geographic distance to the establishment, but either transport costs or preferences correlated with distance (‘home bias’) could cause this decline. Using hospital choices for childbirth, we find that, after controlling for home bias using fixed effects, estimates of the transport cost disutility fall by 40% relative to a standard logit model. We show that referrals are a likely source of home bias. We then show that home bias matters for policy questions including a simulated hospital merger, network adequacy concerns, and the tradeoff between distance and quality.