Competition in the Medical Profession: An Application of the Theory of Regulation: Reply

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In a recent article [7] in this journal, Chris W. Paul, II, presents a model of self-regulatory behavior and tests the model's implications for the medical profession. The article extends Peltzman's [8] general theory of majority maximizing regulatory behavior where the regulator is viewed as a who: (1) redistributes wealth among consumers and producers of the regulated activity in response to voters' demands, (2) takes as payment a portion of this wealth in either political or financial support (votes or campaign contributions), but (3) is a member of neither the gaining or losing groups. In the case of professional self-regulation, Paul argues that a theory of wealth maximizing behavior is more appropriate since the physician-regulator's decisions not only affect his political support (majority), but also his professional income as he directly captures some portion of the wealth transferred to the medical profession as a result of his actions. Several implications of Paul's wealth maximizing formulation are noteworthy. First, when the regulator is a member of the benefited producer group both regulated profits and prices will be higher while the equilibrium magnitude of the political majority will be lower, when compared to the simple majority maximizing solution from independent third party regulation. Second, even when the regulator is a member of the producer group, a simple profit maximizing price will not be set as long as the self-regulator still receives some increase in wealth from increases in his majority. Third, constraints on self-regulatory behavior (such as the way members of the licensing board are selected) may influence the outcome. The purpose of this comment is not to dispute the basic thrust of Paul's argumentthat self-regulators have incentives to behave differently than independent third party regulators. However, we do find flaws in Paul's modeling of the self-regulatory process which seriously distort his empirical tests of the implications for the medical profession. Problems with Paul's modeling are discussed in section two, along with our reformulated model that corrects for these problems. Section three discusses the resulting distortions in Paul's empirical tests. After presenting some alternative estimations and tests, the comment concludes by discussing the implications for the physicians services industry.