Physician Reimbursement, Time Consistency, and the Quality of Care

We use a model of horizontal and vertical differentiation to study physicians' incentives to provide quality in the physician-patient relationship under price regulation. If the price is the only regulatory variable, the social planner cannot implement the first-best policy. Moreover, the second-best policy is time-inconsistent. Excess entry and first-best efficient total quality provision are observed in the game without commitment. Allowing physicians to compete in prices does not solve the commitment problem, since the competitive solution coincides with the time-consistent outcome. In the median-voter equilibrium the time-consistency problem is more severe.