5

I pay the doctor before he conducts the surgery.

Can anyone explain to me whether this statement shows moral hazard or adverse selection?

The Almighty Bob
  • 1,682
  • 1
  • 12
  • 26
UnusualSkill
  • 277
  • 1
  • 3
  • 8
  • 1
    It's rational to work less harder, after you got a long term employment. So it's moral hazard. – Metta World Peace May 02 '15 at 08:28
  • @MettaWorldPeace How about paying doctor before the surgery? what is the possible explanation? – UnusualSkill May 02 '15 at 08:31
  • You can't observe doctor's effort ex ante, so it's rational for a doctor to work at a level of effort that doesn't deserve his payment. You expect this, so you want to pay less. The doctor respond by shirking even more. This non-ending vicious cycle is adverse selection. – Metta World Peace May 02 '15 at 08:38
  • @MettaWorldPeace Why cant I say it is a moral hazard since after paying the doctor, doctor(informed party) knows more about my condition and so may charge me more by recommending unnecessary procedures? – UnusualSkill May 02 '15 at 08:42
  • @MettaWorldPeace and ur explanation: "it's rational for a doctor to work at a level of effort that doesn't deserve his payment."<<would it be more inclined towards moral hazard? – UnusualSkill May 02 '15 at 08:44
  • You're right. You can link it to private information as you did. But private information is to adverse selection what hidden action is to moral hazard. My logic is not very sound, I think of doctor is selling his service of different effort level. – Metta World Peace May 02 '15 at 08:51
  • 1
    To expand on Metta World Peace's comment: The answer depends on your model. Are there two types of doctors (honest and crooked) who put in effort accordingly (this is not a choice, it is determined by their work ethic), or is there only one type of doctor who decides his level of effort based on payment? In the first case you might have adverse selection, in the second you would have moral hazard. – Giskard May 02 '15 at 11:06
  • @MettaWorldPeace But this would be true for any service that is not required on a continuous basis. I think the solution is typically a repeated game, with some likelihood of the news of your "bad service" spreading around. – FooBar May 02 '15 at 11:32
  • @denesp, Thank you for clarification. My first reaction to this question is to find a straightforward analogy to insurance market, or lemon market. – Metta World Peace May 02 '15 at 13:45
  • @denesp, A comment on your comment. It seems to me we can still see it as the same model but with different solution concepts. Your first view can be formulated in Aumann's correlated equilibrium. A type of player specifies what he choose. The second accords with Nash equibrium. – Metta World Peace May 02 '15 at 20:31
  • @MettaWorldPeace I am not sure what corr. equilibrium has to do with this. I think the strategy space is different is just different in the two models. I think we should discuss this in chat but I could not figure out how that works. – Giskard May 02 '15 at 21:18

1 Answers1

8

The problem you are facing has probably both: Moral Hazard and Adverse Selection.

We have hidden action by the doctor (you can't really observe his level of effort during the surgery), therefore we have Moral Hazard.

Additionally, you (probably) can not know beforehand of the doctor is a good or bad doctor, so his type (good or bad) is unknown. So, there is hidden information and therefore possibly Adverse Selection. One example could be that a good doctor would never work for the amount you pay, so the doctor you hire is of the bad type.

Remark: I did not define good/bad doctor here, as it could be many different things; a bad doctor could just be a lazy doctor or a badly trained doctor.

BCLC
  • 360
  • 1
  • 10
  • 28
The Almighty Bob
  • 1,682
  • 1
  • 12
  • 26