Does the Market Punish Aggressive Experts? Evidence from Cesarean Sections, B.E. Journal of Economic Analysis & Policy
There are many markets in which a seller simultaneously diagnoses a customers needs and recommends a product or service to meet them. Customers have limited information on which to judge the merits of the recommendation and may, as a result, agree to excessively costly or unnecessary services. Plumbers, auto mechanics, and lawyers are just a few of the sellers who face the resulting potential for conflict of interest. This asymmetry of information poses a theoretical conundrum. What prevents sellers from always exaggerating the value of their products? A simple but compelling answer is that consumers may choose not to purchase the product if the seller routinely exaggerates its value. A corollary of this is that consumers may choose not to patronize sellers who exaggerate. In this paper, we examine whether the market does, in fact, punish overzealous sellers. We focus on the market for physician services, specifically, deliveries. Physicians may choose from one two possible modes of delivery: vaginal birth versus a more highly reimbursed alternative, cesarean section. Our aim is to test whether physicians who prescribe a disproportionate number of cesarean sections (compared to what might be expected based on patient characteristics) experience a decline in patient share. Following Phelps (2003), who equates a physician's predilection to perform a high cost procedure to that physician's practice style, we measure the practice styles of obstetricians in several counties in Florida. We then estimate a model of consumer choice of provider, where one of the factors weighing on the patient's choice is practice style of the provider. In most of the counties that we study, including the largest, we find that maternity patients prefer not to visit physicians with aggressive styles (i.e. physicians who overprescribe cesarean sections), ceteris paribus. The effect is most pronounced for high income patients and HMO patients, two segments of the market that might be very attractive to some obstetricians.
David Dranove, Subramaniam Ramanarayanan, Andrew Sfekas
Dranove, David, Subramaniam Ramanarayanan, and Andrew Sfekas. 2011. Does the Market Punish Aggressive Experts? Evidence from Cesarean Sections. B.E. Journal of Economic Analysis & Policy.