Estimating the Labor and Ownership Components of Physician Net Income Controlling for Practice Arrangement Choice

Returns to ownership and returns to owner-supplied labor often are commingled in the net income form practice summary measure reported in surveys of professional service firms. This measurement problem poses difficulties in interpreting analyses of output and input market performance. The paper begins to addresses the problem by demonstrating a method for separating labor and entrepreneurial components of net income reported by physicians in a 1984 survey by the American Medical Association. A wage equation, adjusted for negative selection into employee practice arrangements and estimated on employee physician data, is used to predict the the opportunity wage rates for self-employed physicians. Overall, approximately 16 percent of the net income of self-employed physicians in general and family practice and in internal medicine is the result of entrepreneurship; the remaining 84 percent is attributable to labor