Modelling nonlinearities and reference-dependence in general practitioners’ income preferences

This paper tests for the existence of nonlinearity and reference-dependence in income preferences for general practitioners. Confirming the theory of reference dependent utility, within the context of a discrete-choice experiment, we find that losses loom larger than gains in income for Norwegian GPs, a 10% decrease in income is valued approximately equal to a 30% gain. Our results are validated by comparison with equivalent contingent valuation values for marginal willingness to pay and marginal willingness to accept compensation for changes in job characteristics. Physicians’ income preferences determine the effectiveness of ‘pay for performance’ and other incentive schemes. Our results may explain the relative ineffectiveness of financial incentive schemes that rely on increasing physicians’ incomes.