This paper examines how physicians in China respond to a pay-for-performance scheme that mismeasures performance. In … to decrease drug expenditure. Using a unique patient-level data from a large Chinese hospital, I find that physicians … inducement hypothesis as physicians in China may receive under-the-counter commission for prescribing certain drugs. I also find …

random variation in physicians’ and patients’ financial incentives. For a diagnosis for which surgical treatment is somewhat … discretionary, fully informing patients, equivalently eliminating physicians’ financial incentives, reduces surgery rates by almost …