Review of Industrial Organization 17: 193–208, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Partnerships, Proﬁt Sharing, and Quality
Competition in the Medical Profession
W. DAVID BRADFORD
Center for Health Care Research, Medical University of South Carolina, 135 Rutledge Avenue,
Suite 1201, P.O. Box 250550, Charleston, SC 29425, U.S.A.
ROBERT E. MARTIN
Department of Economics, Centre College, Danville, KY 40422, U.S.A.
Abstract. This paper contains a theoretical model of medical partnerships with individual quantity
and quality choice. The ﬁrm selects price, the number of partners and proﬁt sharing. The ﬁrm
encourages inter-ﬁrm quality competition and discourages intra-ﬁrm quality competition through
differential proﬁt sharing. An empirical model using data from a nationwide survey of medical
practices supports the theoretical results. Further, empirical results support the view that time per
visit can be used as a proxy index for quality in the primary care physician market.
Key words: Internal contracting, partnerships, physician ﬁrms, quality.
Professional partnerships have a governance structure where each partner serves as
both a principal and an agent.
Collectively, the partners choose fees, their own
number and the incentive structure for each member. Individually, the partners
make personal production and leisure decisions based on the incentive structure.
This structure contrasts with the traditional top-down orientation of the orthodox
ﬁrm. In response to market forces and changing technology, orthodox ﬁrms are
experimenting with new governance structures. The latest management trends,
“corporate re-engineering” and “worker empowerment”, are cases in point. Sim-
ilarly, self-directed teams (Holstrom, 1982) have shared governance structures that
resemble partnerships. Therefore, this research has direct application to the general
The authors are indebted to Martin Gaynor and Stanley Sedo for their helpful discussion and
advice on this paper. Lisa DeFelice and Sharon Kunz provided valuable research assistance. The
responsibility for any remaining errors lies exclusively with the authors.
We encounter partnerships routinely in medicine, accounting, law, and consulting. Most mod-
ern “partnerships” are professional corporations. The professional corporation and the orthodox
corporation have very similar liability features. Their respective governance structures are quite