Insurance in a Market for Credence Goods

Abstract

We study the impact of insurance on the amount of fraud in a physician-patient relationship. In a market for credence goods, where prices are regulated by an authority, physicians act as experts. Due to their informational advantage, physicians have an incentive to cheat by inducing inappropriate treatment levels. It is shown that a higher co-insurance rate may lead to either less fraud in the market and a lower probability of patients searching for second opinions or more fraud and more searches. We also show that a higher co-insurance rate corresponds with a higher level of physician specialisation.