Compensation, Incentives and the Practice Patterns of Physicians: Theory and Evidence from Microdata Bernard Fortin ∗ , Nicolas Jacquemet † , Bruce Shearer ∗ December 2005 Abstract In this paper, we specify and estimate a structural model in order to analyze the effect of various payment systems on physicians’ practice behaviour both at the extensive margin (hours and weeks of work, number of clinical services) and the intensive margin (time spent per service). Our model also distinguishes between clinical and nonclinical (e.g., management, teaching) activities. To estimate the model, we exploit a unique data set containing labour supply information and payment records for every specialist physician working in the province of Quebec, Canada, during 1996-2002. Importantly, our sample spans a period during which the government changed the way in which specialists were paid. While before 1999, most specialists were paid under a fee-for-service (FFS) system, the government introduced a non-mandatory mixed remuneration (MR) scheme (i.e.,a per diem plus a FFS system at a reduced rate) in 1999. Physician preferences are described with a direct translog utility function and the choice set of each physician is discretized. The model is estimated using a mixed logit approach. Our results, applied to the sub-sample of surgeons, indicate that those who choose the MR system reduce the volume of their clinical services but increase their time spent per unit of service, which may involve a quality/quantity substitution. Keywords: Payment methods, practice patterns of physicians, labour supply, discrete choice models, mixed logit. JEL code: C25, J22, J33, I10, J44. ∗ D´ epartement d’´ economique, Universit´ e Laval and CIRP ´ EE. † D´ epartement d’´ economique, Universit´ e Laval and CIRP ´ EE, Lyon 2 University GATE and CREST INSEE.