Transcript
Chapter 10 – Asymmetric Information and Agency
Key Ideas
Information is a different kind of economic good. If symmetric, both sides have the same information. If asymmetric, one side has different information than the other.
Information may be easily transmitted, or it may be acquired with difficulty.
Under some circumstances, information asymmetries may keep markets from existing.
In many health markets, the provider or the insurer are more knowledgeable than the patient, and act as agents for the principal, that is, the patient.
Teaching Tips
The lemons example can be made familiar to any student who has ever bought or sold a used car. This can spark a lively discussion about how the market works.
Increasing numbers of students have participated in E-Bay or other on-line marketing services. They will be glad to share how they provide information, and how they choose customers (positive and negative feedback). This gives them first-hand experiences as to how markets work.
Most students use the Internet for buying and selling goods. It might serve as an interesting class discussion as to how the students process information they get from the Internet.
Discuss how “managed care” managers serve as agents of the consumer. Are they good agents?
Some insurers “re-underwrite” (change the terms of) health insurance policies, when they get new information about their patients. Is it fair? What are the similarities in this case between life insurance, and car or home insurance?
Chapter 10 – Asymmetric Information and Agency - Multiple Choice
An asymptomatic patient going for a colonoscopy is an example of:
symmetric information because neither the provider nor the client has prior knowledge of the condition.*
asymmetric information, because the clinician has knowledge of the patient’s condition.
asymmetric information, because the provider recommends the test to all patients over the age of 50.
symmetric information, because both the provider and the patient will find out the results.
Asymmetric information means that:
providers and clients have no information.
providers and clients have the same information.
providers and clients have different information.*
clients have no information.
Pauly has argued that about ___% of health expenditures can be regarded as “reasonably informed”.
0 – 5
15 – 20.
25 – 33.*
50 – 60.
In Akerlof’s lemons problem, with symmetric information, suppose that 5 cars are available with quality levels 0, 1, 2, 3, and 4. If the sellers have a reservation price of $2,000 per unit of quality, and the buyers value cars at $3,000 per unit of quality, the equilibrium price per car will be:
$2000.
$4000.
$6000.*
no market will exist.
In problem 4 if instead sellers know more about their cars than do buyers, the equilibrium price will be:
$2000.
$4000.
$6000.
no market will exist.*
In Akerlof’s lemons problem, with symmetric information, suppose that 101 individuals face a possible insurable event of $10,000 with a uniform probability distribution. If the individuals are better informed than the insurer, as to their health and the insurer prices according to the average for the group, the equilibrium price will be:
$2500.
$5000.
$7500.
no market will exist.*
In Akerlof’s lemons problem, with symmetric information, suppose that 101 individuals face a possible insurable event of $10,000 with a uniform probability distribution. If the insurer requires a physical examination from all of those potentially insured, and the insurer prices according to the average for the group, the equilibrium price will be:
$2500.
$5000.*
$7500.
no market will exist.
Adverse selection in insurance markets typically occurs when:
consumers have better information on their health than do insurers.*
insurers have better information on their health than do consumers.
employers insist on a single plan for all clients.
employees choose to self-insure.
If smokers do not disclose their habit:
they will pay lower premiums than is economically efficient for their insurance.
non-smokers will pay higher premiums than is economically efficient for their insurance.
non-smokers will eventually leave the insurance pool if they can.
Answers (a), (b), and (c) are correct.*
Adverse selection is economically inefficient because:
lower risks will tend to underinsure.
all clients will tend to overinsure.
higher risks will tend to overinsure
answers (a) and (c) are correct.*
Insurers may protect themselves against asymmetric information, leading to adverse selection of high-risk patients, by:
refusing to pay claims occurring within a year of the date that the policy is written.
requiring physical exams for all clients.
ceasing to offer the particular type of insurance.
answers (a), (b), and (c) are correct.*
“Cream skimming” refers to:
a form of moral hazard where consumers demand excess care.
a form of adverse selection where HMOs or insurers seek healthier clients*
government’s forcing insurers to treat all clients.
answers (a) and (c) are correct.
An “individual mandate” requiring people to buy insurance, addresses “cream skimming” because:
it pushes the healthier people, who might otherwise not purchase insurance into the risk pool.*
it makes it illegal for managed care organizations or insurers to seek healthier clients.
it helps the government balance its budget.
it provides for a single payer for all health insurance.
In an agency relationship, the ________ acts as an agent for the _________, the principal.
insurer; government.
government; insurer.
provider; patient.*
patient; provider.
In an agency relationship, the ________ acts as an agent for the _________, the principal.
managed care administrator; patient.*
government; insurer.
insurer; government.
patient; provider.
A managed care administrator is likely to:
serve as an informed buyer for plan members.*
refuse to allow necessary care.
enforce governmental health care mandates.
answers (a) and (c) are correct.
Research shows that consumers ____ to price differentials because _____.
do not respond; they have no information.
do not respond; they have insurance.
respond; they have some information.*
do not respond; HMOs provide all of their care.
In general, increased information for consumers has the following impact on consumers’ quantity demanded.
It makes it less responsive to price changes because consumers trust their providers.
It makes it more responsive to price changes, because consumers can shop among providers.*
It has no impact on quantity demanded.
It depends on the supply elasticity.
By the theory of reputation goods, an increased number of providers may lead to _____ prices because consumers have ______ information about alternatives and hence ____ less elastic demand:
lower; more; more.
higher; less; less.*
lower; less; more.
higher; more; more.
Increased information ____ providers’ monopoly power, thus ____ the prices paid by clients.
reduces; increasing.
increases; reducing.
increases; increasing.
reduces; reducing.*
Pauly and Satterthwaite show that when physicians become numerous, the average number of friends who see any provider diminishes. This, in turn, diminishes the average level of information available to consumers, leading to:
lower quality of care.
higher prices of care.*
worse access to care.
Answers (b) and (c) are correct.
If there is not perfect information:
economic analysis will provide little help because its underlying assumptions are invalidated.
goods of uncertain quality may enter the market.*
firms will not engage in product innovation.
physicians will serve as perfect agents for their patients.
Even though there may not be perfect information ________ may lead to the development of reasonably efficient markets:
television advertising.
selective contracting by care managers.
a group of informed buyers.*
Answers (b) and (c) are correct.
Imperfect information has led for some economists to expect ________ in health care than in more competitive markets:
higher quality.
lower quality.
more price dispersion.*
less price dispersion.
In examining the demand for psychotherapy, Haas-Wilson found that consumers:
have little information.
will not purchase any psychotherapy services without insurance.
only purchase through HMOs.
respond to higher quality by paying more.*
Chou measured information on nursing homes by looking at:
amount of advertising used.
visits by family members.*
referrals by physicians.
Answers (a) and (b) are correct.
Studies have found that ______ quality providers are generally paid _______ prices.
higher; lower.
higher; higher.*
lower; higher.
none of the above are correct.
A study of fertility clinics by Bundorf and colleagues found that would-be patients.
were indifferent to the success rates of the clinics.
increased their use of clinics with higher success rates.*
increased their use of clinics with higher success rates only if they were insured.
none of the above are correct.
Howard examined responses to quality in kidney transplant procedures. He found that a ___ increase in the one-year graft failure rate was associated with ____ in patient registrations at a major medical center.
one standard deviation; a six percent reduction.*
one standard deviation; a six percent increase.
one unit; 5 unit decrease.
one-half percent; no change.
A series of studies by the Institute of Medicine have found that about ____ deaths and ____ excess injuries occur each year due to problems with quality and safety.
10,000; 100,000.
50,000; 500,000.
100,000; 1,000,000.*
200,000; 2,000,000.
