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Reference Incomes, Loss Aversion, and Physician Behavior

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Author Info

  • 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.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 4 (November)
Pages: 909-922

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Handle: RePEc:tpr:restat:v:85:y:2003:i:4:p:909-922

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Kaus, Wolfhard, 2013. "Conspicuous consumption and “race”: Evidence from South Africa," Journal of Development Economics, Elsevier, vol. 100(1), pages 63-73.
  2. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 963-1002, August.
  3. Alexandre Mas, 2006. "Pay, Reference Points, and Police Performance," NBER Working Papers 12202, National Bureau of Economic Research, Inc.
  4. Fang, Hai & Rizzo, John A., 2009. "Competition and physician-enabled demand: The role of managed care," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 463-474, October.
  5. Rizzo, John A. & Zeckhauser, Richard J., 2007. "Pushing incomes to reference points: Why do male doctors earn more?," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 514-536, July.
  6. Chambers, Valrie & Spencer, Marilyn, 2008. "Does changing the timing of a yearly individual tax refund change the amount spent vs. saved?," Journal of Economic Psychology, Elsevier, vol. 29(6), pages 856-862, December.
  7. Frank Eijkenaar, 2013. "Key issues in the design of pay for performance programs," The European Journal of Health Economics, Springer, vol. 14(1), pages 117-131, February.
  8. Amitabh Chandra & Jonathan Skinner, 2012. "Technology Growth and Expenditure Growth in Health Care," Journal of Economic Literature, American Economic Association, vol. 50(3), pages 645-80, September.
  9. Kuegler, Alice, 2009. "A Curse of Comparison? Evidence on Reference Groups for Relative Income Concerns," Policy Research Working Paper Series 4820, The World Bank.
  10. Georgellis, Yannis & Gregoriou, Andros & Tsitsianis, Nikolaos, 2009. "Reference-dependent preferences in the public and private sectors: A nonlinear perspective," MPRA Paper 17021, University Library of Munich, Germany.
  11. Rablen, Matthew D., 2010. "Performance targets, effort and risk-taking," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 687-697, August.
  12. Guglielmo Maria Caporale & Yannis Georgellis & Nicholas Tsitsianis & Ya Ping Yin, 2007. "Income and Happiness across Europe: Do Reference Values Matter?," CESifo Working Paper Series 2146, CESifo Group Munich.
  13. Georgellis, Yannis & Gregoriou, Andros & Tsitsianis, Nikolaos, 2008. "Adaptation towards reference values: A non-linear perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 768-781, September.
  14. Godager, Geir & Wiesen, Daniel, 2011. "Profit or Patients' Health Benefit? Exploring the Heterogeneity in Physician Altruism," HERO On line Working Paper Series 2011:7, Oslo University, Health Economics Research Programme.
  15. Huffman, David B. & Barenstein, Matias, 2004. "Riches to Rags Every Month? The Fall in Consumption Expenditures Between Paydays," IZA Discussion Papers 1430, Institute for the Study of Labor (IZA).

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