Compensation and Productive Efficiency in Partnerships: Evidence from Medical Groups Practice

In this paper, the authors develop and test a model of the effect of alternative compensation arrangements on productive efficiency in medical group practices. The technique employed is maximum likelihood production frontier estimation. The authors provide a simple behavioral model of the determination of productive efficiency and a new interpretation of the economic measure of technical efficiency. They derive a "behavioral production function" that relates production to individual responses to incentives, and they indicate that the impossibility of recovering the parameters of the production technology from observed behavior. Overall, the empirical results indicate that incentives do affect productivity.