Presenter:

Ting Liu

Authors:

Ting Liu

Chair: Richard Scheffler; Discussant: Chris Garmon Tue June 6, 2006 10:45-12:15 Room 235

Rationale: Informal payments, which are payments to physicians in cash or in kind made outside official channels for services that are covered by the public health care system, are a widespread phenomenon in many developing countries. Various policies have been proposed by policy makers to deal with this problem. However, few studies investigate the rationale behind informal payments and the welfare implications of different policies.

Objectives: This paper examines the rationale for why patients offer informal payments and compares the effectiveness and welfare implication of various policies at alleviating this problem.

Methodology: We adopt a game theoretical approach to model the rise and spread of informal payments. There are two doctors, a skilled doctor and a naive doctor; two patients, a needy patient and a less needy patient. Each patient demands one unit of service while each doctor offers one unit service. Patients can distinguish doctors and prefer to be seen by the skilled doctor; however, the needy patient has a bigger incremental increase in utility if he is treated by the skilled doctor instead of the naive doctor. Government can not observe the difference in doctors, therefore set the same price for both types. Excess demand thus leads to competition between the two patients who simultaneously offer informal payments to the skilled doctor. Informal payments become sunk cost once patients pay. The skilled doctor treats the one who offers a higher informal payment. In case of a tie, he randomly picks one patient to treat. We derive the Nash Equilibrium in the game, which has implications for the size and the pattern of informal payments. Furthermore, we compare the welfare implication of three different regimes: informal payment banned, informal payment allowed, selling the right to choose doctors, i.e. the patient pays the highest price has the right to choose which doctor to see.

Results: We find that selling the right to choose doctors is always the best choice in three different regimes. When the difference in patients’ willingness to pay is small, banning informal payments is superior to allowing it; when the difference in patients’ willingness to pay is large, allowing informal payment is superior to banning it.

Conclusion: On one hand, in presence of asymmetric information between government and patients, allowing informal payments gives needy patient a bigger chance to be seen by the skilled doctor, therefore improves allocation efficiency; on the other hand, it may lead to wasteful competition between patients. The trade-off hinges on the heterogeneity in consumers’ willingness to pay for the difference services. When the heterogeneity is large, government should allow informal payments, otherwise it should ban informal payments