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Summary Module 3: Asymmetric information, agency & supplier-induced demand
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Lecture 3AAgent → certain goals
The principal needs to hire an agent, the agent needs to do his performance in order to
realize the goals of the principal. They both have self-interest.
In nearly every market we find instances/risks of information gaps.
Asymmetric information and agency relationships:
● Transactions in markets with asymmetric information are characterized by agency
relationships.
○ Whenever the relatively uninformed partly (principal) delegates decision
making authority to the relatively well-informed party (agent).
● Principal-agent problems emerge if principal and agent have conflicting interests.
● In that case, agents have an incentive to exploit their information surplus.
○ Resulting in inefficient outcomes (in terms of quantity, quality and price).
Lecture 3B
Asymmetric information and agency relationships:
● Principal-agent problems may be exacerbated if there is considerable outcome
uncertainty in which case it is not clear whether the outcome is the result by the
actions of the agent.
● Health care markets consist of at least, three parties (patients, providers, ‘third party
payers’), each with different levels of information and different interests.
● 3 agency relationships:
○ Patient vs provider
○ Provider vs payer (insurer)
○ Patient/insured vs payer (insurer)
● Intertwined agency relationships → particularly noteworthy is the double
agency role of physicians.
○ With regard to patients → to provide high quality care
○ With regard to third-party payers → to economize on the use of care
Agency relations in health care:
● Agency problems between doctors and patients
○ The ‘perfect’ physician is one who chooses as the patients themselves would
choose if only the patiënt possessed the information that the physician does.
○ This is in line with the medical code of ethics.
, ● Consumer information and prices
○ Medical care is a reputation good
○ Market can be characterized as monopolistically competitive
○ Under these conditions, an increase in the number of providers can increase
prices
● Consumer information and quality
○ Consumers cannot easily monitor quality
○ Costly search for quality information
○ Consequences of poor quality can be severe
● Cream-skimming behaviour of insurers
○ Insurers being more interested in searching for ‘good risks’ rather than in
providing quality care
Principal-agent issues:
1. Moral hazard:
○ Principal → insurer
○ Agent → patient and/or doctor
○ Problems:
■ Patiënt may take less preventive action due to insurance (ex ante
moral hazard)
■ Patients may use more, or more expensive health care due to
insurance (ex post moral hazard)
■ Physicians may prescribe more, or more expensive health care due to
insurance (provider induced moral hazard)
○ Result → overconsumption/overprovision of care
2. Adverse selection:
○ Principal → insurer
○ Agent → applicant for insurance
○ Problem → applicants may exploit their risk-information surplus to
buy more coverage at a stated premium than an equally well-
informed insurer would be prepared to offer.
■ Premiums increase → health people increasingly flee →
unhealthy people remain → insurers average costs increase →
premiums increase
○ Result → elimination of the health insurance market
Lecture 3C
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