Canadian Journal of Economics, 41(4), November 2008, 1262-1284. (With Boris Kralj and Darrel Weinkauf)

Physician threshold systems aim to limit increases in physician compensation by taxing physicians for practice income that exceeds a specified threshold. We examine a reform to this system in Ontario that provides a unique opportunity to assess the effect of fee changes on physician behaviour, free from the biases that potentially affect simple time-series or cross-section inference. We find that: (1) the income effects of fee changes are small, but significant; (2) the income effect dominates the substitution effect only for a minority of services with relatively lower prices and higher volumes; and (3) the cross-effect of fee changes tend to be significant only for services with relatively higher prices and lower volumes.

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