Competition in the medical profession : a test of the economic theory of regulation

Abstract

This study accomplishes two principal objectives: 1) the extension of the general theory of economic regulation to include the case of a self-regulated profession, and 2) the specification and testing of an empirical model with use of data from the medical profession. The approach taken to the theory of regulation not only sheds some light on the form and function of the restrictive regulatory process, but also leads to a refutable hypothesis of regulatory action, which was empirically tested. Others have dealt with the medical profession to test for the existence of monopoly returns, while the concern here is with monopoly returns it is not the major purpose of this study. As noted above, the purpose here was to set forth a more general theory of regulation and use data from the medical profession to test the validity of the theory. Until Stigler (1971) offered an economic formulation of regulation in his seminal work, "The Theory of Economic Regulation," the theory of regulation literature took two approaches. The first was the "capture" or total control theories where the regulator served a single economic interest exclusively. The second, the "public Interest" formulation, contended that regulation was intended to eliminate some unfortunate allocative consequence of market failure. Chapter II sets forth and discussed these two theories and offers an explanation why they do not offer an acceptable hypothesis, and offers the Stigler-Peltzman formulation as an acceptable alternative. By extending Peltzman's model this study formulates a general theory of economic regulation in which the regulatory process, as suggested above, is a vehicle for wealth redistribution. The theory explicitly treats the regulator as a member of the regulated interest group. The regulator attempts to capture a portion of the wealth transfer as opposed to merely maximizing his political majority of redistributing wealth between groups. This treatment differs from the results derived from the case assuming the regulator maximizes his simple political majority.