Partnerships provide a classic example of the tradeoff between risk spreading and moral hazard. The degree to which firms choose to spread risk and sacrifice efficiency incentives depends upon risk preferences, for which data are typically unavailable. The authors use a unique dataset on medical group practice to investigate this tradeoff. Risk aversion leads to compensation arrangements, which spread more risk through greater sharing of revenues. The authors find that compensation arrangements with greater degrees of revenue sharing significantly reduce physician effort. The results imply that changing the method of physician payment from fee-for-service to capitation will dramatically reduce physician effort.
Originally published in: RAND Journal of Economics, v. 26, no. 4, Winter 1995, pp. 591-613.
This report is part of the RAND Corporation reprint series. The Reprint was a product of the RAND Corporation from 1992 to 2011 that represented previously published journal articles, book chapters, and reports with the permission of the publisher. RAND reprints were formally reviewed in accordance with the publisher's editorial policy and compliant with RAND's rigorous quality assurance standards for quality and objectivity. For select current RAND journal articles, see External Publications.
The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.