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Reference Incomes, Loss Aversion, and Physician Behavior

Author

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  • John A. Rizzo

    (Ohio State University)

  • Richard J. Zeckhauser

    (John F. Kennedy School of Government, Harvard University)

Abstract

We examine the effects of reference income on the behavior of young male physicians. Using a unique panel of data, we relate physicians' reference and actual incomes to their subsequent income growth. Reference income has a strong positive effect on subsequent income for physicians who are below their reference points, but not for physicians who are at or above their reference points. Loss aversion, which posits a kink in utility at the reference point, explains this puzzling pattern. Physicians respond strongly to shortfalls from the reference point-they take unappealing actions to boost earnings-because the marginal utility of income is steep in that range. Competing prominent theories, tested here, fail to explain these relationships. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • John A. Rizzo & Richard J. Zeckhauser, 2003. "Reference Incomes, Loss Aversion, and Physician Behavior," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 909-922, November.
    • Handle: RePEc:tpr:restat:v:85:y:2003:i:4:p:909-922
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