【正文】 PrincipalAgent Model and Supplier Induced Demand Introduction Last topic showed importance of information – in case of health information is not always perfect or else it may be asymmetric. Owing to lack of information agency problems arise whereby buyers /sellers rely on other parties to make decisions on their behalf. We have already encountered asymmetric information in case of insurance market where it led to problem of adverse selection – insurance panies did not know whether patients were high risk or low risk – in certain cases can lead to market failure. Here we concentrate on agency issues and particular case of supplier induced demand. First we briefly ask question: what is the extent of information problems in health sector? Asymmetry of information may exist between patient and doctor and also between insurance pany and specialist. But many items of health care expenditures are characterised by a reasonable degree of information . regular medical checkups or purchase of standard medications also many markets are characterised by lack of perfect information . markets for insurance, cars, hifi equipment etc. Also if a sufficient number of wellinformed consumers exist they may be sufficient in number to impose market discipline . in market for personal puters. There are also mechanisms to deal with these problems to some degree . licensure, certification, threat of legal action etc. But also note that in some cases these may just be ways of perpetuating restrictive practices! But maybe problem with health is that if mistakes are made they may be very difficult to reverse unlike mistakes made in purchase of other goods. The Agency Relationship Agency relationship is formed when a principal (. a patient) delegates decisionmaking authority to another party the agent (. a doctor). Can also have, say, Department of Health delegating decisions to individual GPs. Motive behind such delegation is that principals recognize they are relatively uninformed about most appropriate decisions to be made – this is solved by use of an informed agent. Thus asymmetry of information is central to agency issues. Other example would be shareholders who delegate decisions re their pany to a managing director. We look at two examples of problems in agency (1) problem of a health authority or health department in terms of decisions made by GPs (2) problems individual patients have with doctors. Suppose health authority wishes to maximise health benefits of its population – by benefits we mean value of gross health benefits less salaries paid to GPs. Health authority can only observe gross health benefits but cannot observe underlying causes. We assume that moary values can be put on health outes (we discuss this later). By “state of the world” we mean random factors which will affect health outes but which are out of control of GP . geic characteristics of patients, weather, other aspects of patient behaviour which GP cannot control. We assume this variable can take one of three values, low, medium or high (where high represents case where these factors lead to good health outes). Also assume that GP can choose between two levels of effort, high (1) or low (0). Table below shows binations of gross health outes, effort and the probability of various states of world. State of World Low Medium High Probability Effort=0 100 100 400 Effort=1 100 400 400 Health outes depend upon efforts of GP and state of world, so if oute of 100 is observed health board do not know if this is due to bad state of world and high effort or medium state of world and low effort. Suppose that GPs utility is given by eyU ?? where y is ine and e is effort. Also assume that the best the GP can do outside of medicine is utility of 10. Thus expected utility must lie above 10 if GP is to stay in medicine (known as participation constraint). Note that functional form of utility function implies declining marginal utility of ine . ??? . MU falls as y rises – this implies that GP is risk averse. If GP is paid flat salary, unrelated to health outes, then no incentive to put in any effort other than 0. Then best flat salary offered will be 100, since this gives utility of 10 when effort is 0. Expected gross health outes are then ++=175. Net health outes for health board is then 175100=75. Health board can do better if they offer bonus for good health outes . change contract of GPs so as to improve performance. GP may be tempted to work harder but effort es at cost since if GP is risk averse he must be offered higher average salary to pensate for greater risk. If average salary too high then in terms of health outes this is too expensive. Assume basic salary is S and let bonus be B. B