ABSTRACT
This chapter addresses the critical role of information in health economics. Traditional economic models assume that both consumers and producers know everything that is relevant about the prices and qualities of the goods. However, many health care services and products generate wide information and knowledge gaps between consumers and providers. As a result of this information asymmetry, patients often rely heavily on providers to form an agency relationship regarding treatment recommendations. The chapter describes the nature and consequences in the health economy of both asymmetric information and imperfect agency.
The chapter introduces the “Lemons Principle” to illustrate a theoretical model where asymmetric information between buyers and sellers in the used-car market can result in a decrease in the quality of cars available in the market, and ultimately, a collapse of the entire market. The reader learns that this principle can then be applied to health insurance to describe how buyers’ information advantages regarding their own health risks create inefficiencies by driving out lower-risk individuals. The chapter describes various mechanisms found in insurance and other health care markets that reduce the inefficiencies resulting from asymmetric information. The chapter also includes extensive discussions of the effects of imperfect information on the levels of competition, prices, and qualities of health care services.
