Agency Theory - Coggle Diagram
Agency Problem occurs in health care provision
Health care is an imperfect market due to imperfect information
Agent is the provider and principal is the consumer
Dr's may overtreat and patient is unaware.
Supplier induced demand
"An agency problem is a conflict of interest inherent in any relationship where one party is expected to act in the best interest of another. Agency problems arise when incentives or motivations present themselves to an agent to not act in the full best interest of a principal."
Consumers are usually the best judge of their own best interests. False in the case of health.
Principal cannot verify the agent took the correct action for their best interest
Solutions to Agency Problem
Explicit (Formal) Contracts
These are legally binding
Implicit (informal) contracts
Downsides to Contracts
Cost of contract
"Bounded rationality is a human decision-making process in which we attempt to satisfice, rather than optimize. In other words, we seek a decision that will be good enough, rather than the best possible decision".
Factors affecting contracts
Incentive Regulation - rules that regulate price
What is Agency Theory?
Describes the relationship between the principal who delegates work to agent using contract