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

Although economists generally believe that the medical profession earns above normal returns by restricting entry,' this proposition has never been directly tested. There have been indirect attempts to determine the existence and extent of above normal returns in medicine by comparing the rate of return to investment in medicine with various other occupations. The first work along these lines was performed by Friedman and Kuznets [9]. Using income data generated for various professions in the 1930s, they found physicians enjoyed a substantial premium over dentists in terms of the rate of return to their educational expenses. Friedman and Kuznet's results, however, are not without critics [13; 14]. In addition to the findings of Friedman and Kuznets, Kessel [11; 12] has criticized the medical profession for cartel behavior; again others disagree with this contention. The debate continues, but no test of the actual effect of licensing limitations on the salaries of physicians, and hence rate of return to investment in medical education, has been performed. That task is the purpose of this study. Peltzman [15] has provided a general theory of regulation which may be employed to test the effect of restrictive practices of the medical profession on the level of physicians' earnings, and thus provide evidence as to the intent and result of physicians' restrictive practices. Section II of this paper is a review and critique of the literature concerned with restrictive practices and above normal returns to the medical profession. The third section extends Peltzman's theory to the case of a self-regulating profession, the structure of regulation in medicine. Section IV empirically tests the model and discusses its implication. The fifth and final section contains a summary and conclusions.