Happy Doctor Makes Happy Baby?

Physician-induced demand, whereby physicians deviate from providing optimal health care in the pursuit of personal gain lies at the heart of concerns about publicly provided health care. However, little is known how payments systems affect the ultimate outcome—patient health. Exploiting unique policy-induced variation in Denmark, I investigate the impact of physician payment contracts on infant health. In a difference-in-differences framework, I find that firstborn infants exposed in the womb to the care of general practitioners with capitation contracts have poorer infant health outcomes then infants exposed to fee-for-service contracts, and these estimated effects are primarily driven by younger mothers. (JEL D23, I12, I18, J13)