Asymmetric Information

Shortly after reading PGL’s healthcare post, I came across this in a Wired article, Cracking the Real Estate Code (should be available here on May 5th), by Steven Levitt and Stephen Dubner, authors of Freakonomics. Their Wired article describes how markets can go awry in the face of significant asymmetric information, primarily noting that real estate agents tend to keep their own houses (on which they pocket about 97% of any resulting increase in the sale price) on the market for longer than their clients’ houses (on which they pocket only 1.5% of any increase in price from holding out longer). Along the way Levitt and Dubner point out that asymmetric information also rears its head in the healthcare market:

Of course, sometimes an expert might manipulate his advantage for his own benefit. If your doctor suggests that you have an angioplasty – even though current research suggests hat angioplasty often does little to prevent heart attacks – your first thought won’t likely be that the doctor is using his informational advantage to make a few thousand dollars for himself or his buddy. But as David Hills, an interventional cardiologist at the University of Texas Southwestern Medical Center in Dallas explained to The New York Times (pay-wall), a doctor may have the same economics incentives as a care salesman or a funeral director or a mutual fund manger: “If you’re an invasive cardiologist and Joe Smith, the local internist, is sending you patients, and if you tell them they don’t need the procedure, pretty soon Joe Smith doesn’t send patients anymore.”

Or consider these findings of a 1996 medical study: Obstetricians in areas with declining birthrates are more likely to perform cesarean section deliveries than obstetricians in growing areas – suggesting that when business is tough, doctors may try to ring up more expensive procedures.

While the aggregate impact of such asymmetric information on healthcare costs are, to my knowledge, unknown and unestimated, they are one potential example of the “significant inefficiencies” I hypothesized in the conclusion to this post. For another example of asymmetric information leading to higher healthcare costs (though not to worse care), see How Do Hospitals Respond to Price Changes?, forthcoming in the AER, by Leemore Dafny.