Abstract
This paper offers a theoretical model of the spatial relationship between physicians and hospitals in urban areas. Previous conceptions about the same were based on implicit restrictions on the physician-service production function. By allowing physicians to determine location jointly with input and output levels, the model relaxes these restrictions. In result, the spatial relationship between physicians and hospitals depends on the ability of physicians to substitute ambulatory for hospital care and upon the influence of transportation costs on scale economies. Further, the model extends the theory of production in space and offers an explanation for previously reported mixed empirical results.
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