Econ+157+Topic+B+Asymmetric+Information

Econ+157+Topic+B+Asymmetric+Information - Econ 157 - Topic...

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ASYMMETRIC INFORMATION AND AGENCY Econ 157 - Topic B Econ 157: Mortimer 2/3/2010 1
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Overview Asymmetric information Buyers and sellers have different levels of information Beneficiaries have more information than the insurer Providers have more information than patients Agency relationship Because of lack of information buyers or sellers depend on other parties to help make decisions Patients rely on providers to make medical decisions Adverse selection Insurance attracts patients who are likely to use services at a higher rate than average Premiums are underpriced for high risk patients and overpriced for low risk patients High risk patients over-insure and low risk patients under-insure The efficiency of the insurance markets is diminished Redistribution of income from the healthy to the poor Econ 157: Mortimer 2/3/2010 2
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How Bad is the Problem of Asymmetric Information? Not too bad… Pauly (1988) : About ¼ or more of health-care expenditures are reasonably informed purchases Markets typically perform well if a sufficient number of consumers are reasonably well- informed The well-informed buyers can discipline markets and help bring P and Q to competitive levels Econ 157: Mortimer 2/3/2010 3
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The Lemons Principle: Used Cars Akerlof (1970) showed that asymmetric information may cause markets to perform poorly or disappear Used car markets Sellers know more than buyers about the quality of used cars Since buyers do not know the quality of each individual car, they
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Econ+157+Topic+B+Asymmetric+Information - Econ 157 - Topic...

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