Abstract
I examine physician agency in healthcare services in the context of the choice between brand-name and generic pharmaceuticals. I examine micro-panel data from Japan, where physicians can legally make profits by prescribing and dispensing drugs. The results indicate that physicians often fail to internalize patient costs, explaining why cheaper generics are infrequently adopted. Doctors respond to markup differentials between the two versions, indicating another agency problem. However, generics’ markup advantages are short-lived, which limits their impact on increasing generic adoption. Additionally, state dependence and heterogeneous doctor preferences affected generics’ adoption. Policy makers can target these factors to improve static efficiency.
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