Abstract
We study job incentives in moonlighting, when public‐service physicians may refer patients to their private practices. Some doctors in the public system are dedicated, and behave sincerely, but others—the moonlighters—are utility maximizers. Allowing moonlighting always enhances aggregate consumer welfare, but equilibrium public‐care quality may increase or decrease; if quality increases, moonlighting improves each consumer's expected utility. Unregulated moonlighting may reduce consumer welfare as a result of adverse behavioral reactions, such as moonlighters shirking more and dedicated doctors abandoning their sincere behavior. Price regulation in the private market limits such adverse behaviors in the public system and improves consumer welfare.
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