The Mayo Clinic and Inequality

I was writing about Rochester Minnesota and I remembered a lesson from my undergrad public economics class.

The lesson was that weirdly enough, inequality increases public goods. The understanding beyond writing out math is that when everyone is equal it is hard for anyone to step up and provide the good of their own free will because of the free rider problem. Due to this fact the government uses coercion to get its money to provide a more optimal level of public goods than we would willingly just give over. On the other hand, in really unequal areas, the government doesn't have to do much to create public goods. The rich will simply do it on their own.

For a while I had to scratch my head to think of any examples of the rich providing public goods. There were a lot of counter arguments that popped into my head. Most charitable giving goes to places that receive a lot of other charitable giving. If there is an expensive park around built by a rich philanthropist, there are probably other rich people around that the philanthropist could hope to free ride on to get some public goods. Additionally, a lot of philanthropy is not for public goods that the philanthropist himself plans to use. Usually it is something the philanthropist has already used or a cause that gives him or her some utility from helping others. The standard economic model did not fit as well, or so I thought in class. Of course, behavioral quirks got in the way of another rational economic model.

However, I feel the Mayo Clinic shows the model can work. Especially when applied to businesses that are more rational than the individual. The Mayo Clinic fulfilled a number of important parts of the model. It employs around one third of the town, dwarfing other businesses in the area. There is a lot of money in the area, so you can actually have public goods. Finally, the model's results jive well with what is happening in Rochester MN right now. The city is undergoing an expansion called "Destination Medical Center" that aims to make Rochester an even better place to live and visit (for medical treatment).  The plan will cost six billion dollars and the vast majority of that money is being spent by Mayo. Most of that money is going into public goods for visitors, residents, and medical tourists.

It's fairly logical for Mayo to do this. On the website for the Destination Medical Zone they say that medical tourists spend 70% of their time out and about in Rochester, so their business depends on the amenities available in Rochester. It's also not possible for Mayo to free ride.  There are no other businesses that could build these public goods in Rochester. It would be a bad idea to rely entirely on the government to provide the public goods that Mayo wants, as Mayo knows its preferences better than the city officials do.

It seems to me that the model was a fairly accurate way to describe how things are going in Rochester. There's a lot that can be learned from this in how industries set up public goods institutions. In places where you have a company that dominates the area, it can be the institution that provides public goods. In areas that you have multiple institutions you need a coercive mechanism or a strong private partnership institution that can provide public goods.

It would be an interesting idea to explore how institutions vs. individuals provide public goods within this model. What level of inequality do you need with individuals to get public goods? what level do you need with businesses to get public goods?

Below is some of a model I wrote up for the class. Feel free to plug and chug to find something else fun. The variable A is a way to change preferences and how much the agents like the public good.