Chapter 9. Physician Agency

This chapter reviews the theory and empirical literature on physician market power, behavior, and motives, referred to collectively as the issue of physician agency. The chapter is organized around an increasingly complex view of the demand conditions facing a physician, beginning with the most simple conception associated with demand and supply, and building through monopolistic competition models with complete information, and finally models with asymmetric information. Institutional features such as insurance, price regulation, managed care networks and noncontractible elements of quality of care are incorporated in turn. The review reveals three mechanisms physicians may use to influence quantity of care provided to patients: quantity setting of a nonretradable service, influencing demand by setting the level of a noncontractible input (quality), and, in an asymmetric-information context, taking an action to influence patient preferences. The third mechanism is known as physician-induced demand. The empirical literature on this topic is reviewed. Theories based on alternatives to profit-maximization as objectives of physicians are also reviewed, including ethics and concern for patients, and the target-income hypothesis. The target-income hypothesis can be rejected, although there is empirical support for non-profit maximizing behavior.