NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Physician Income Prediction Errors: Sources and Implications for Behavior

Sean Nicholson, Nicholas S. Souleles

NBER Working Paper No. 8907
Issued in April 2002
NBER Program(s):   EFG   HC

Although income expectations play a central role in many economic decisions, little is known about the sources of income prediction errors and how agents respond to income shocks. This paper uses a unique panel data set to examine the accuracy of physicians' income expectations, the sources of income prediction errors, and the effect of income prediction errors on physician behavior. The data set contains direct survey measures of income expectations for medical students who graduated between 1970 and 1998, their corresponding income realizations, and a rich summary of the shocks hitting their medical practices. We find that income prediction errors were positive on average over the sample period, but varied significantly over time and cross-sectionally. We trace these results to persistent specialty-specific shocks, such as the growth of health maintenance organizations (HMOs) and other changes across health care markets. Physicians who experienced negative income shocks were more likely to respond by increasing their hours worked, allocating fewer of their work hours to teaching/research and more to patient care, and were more likely to switch specialties.

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Document Object Identifier (DOI): 10.3386/w8907

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