Summary

We develop a principal-agent model to analyze how the behavior of a physician in the public sector is affected by his activities in the private sector. We show that the physician will have incentives to over-provide medical services when he uses his public activity as a way of increasing his prestige as a private doctor. The health authority only benefits from the physician’s dual practice when it is interested in ensuring a very accurate treatment for the patient. Our analysis provides a theoretical framework in which some actual policies implemented to regulate physicians ’ dual practice can be addressed. In particular, we focus on the possibility that the health authority offers exclusive contracts to physicians and on the implications of limiting physicians ’ private earnings. Copyright # 2004 Joh