Moral Hazard and Risk Spreading in Partnerships

Martin Gaynor and Paul Gertler

RAND Journal of Economics, 1995, vol. 26, issue 4, 591-613

Abstract: Partnerships provide a classic example of the tradeoff between risk spreading and moral hazard. The degree to which firms choose to spread risk and sacrifice efficiency incentives depends upon risk preferences, for which data are typically unavailable. We use a unique dataset on medical group practice to investigate this tradeoff. Risk aversion leads to compensation arrangements, which spread risk through greater sharing of revenues. We find that compensation arrangements with greater degrees of revenue sharing significantly reduce physician effort. The results imply that changing the method of physician payment from fee-for-service to capitation will dramatically reduce physician effort.

Date: 1995
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Working Paper: Moral hazard and Risk Speading in Partnerships (1996)
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