Physician financial incentives and cesarean section delivery

The "induced-demand" model states that in the face of negative income shocks, physicians may exploit their agency relationship with patients by providing excessive care. We test this model using an exogenous change in the financial environment facing obstetrician/gynecologists: declining fertility in the United States. We argue that the 13.5% fall in fertility over the 1970-1982 period led ob/gyns to substitute from normal childbirth toward a more highly reimbursed alternative, cesarean delivery. Using a nationally representative microdata set for this period, we show that there is a strong correlation between within-state declines in fertility and within-state increases in cesarean utilization.