Supplier Induced Demand

Question 1

Describe the principal-agent problem

Answer 1

In healthcare, the doctor (agent) acts on behalf of the patient (principal). The principals have a lack of knowledge and so cannot guarantee that the agent is acting to maximise the principal’s utility.

However, the agent may be acting to maximise their own utility, and because the principal has imperfect knowledge and so the agent can make choices to maximise their own utility, not the principal’s.

Question 2

Give examples of papers examining the principal-agent problem.

Answer 2

Nguyen (2011) found that in Vietnam, prescription of injectable drugs was higher in private clinics than public clinics (where doctors have more to gain from drug prescribing), and significantly more drugs were prescribed to those with lower education levels and those who has a secondary education or higher.