It Takes Two Hands to Clap: The Effects of Reputation and Search in Healthcare Markets

Abstract

Asymmetric information between physicians and patients often leads to rampant overtreatment and low market efficiency. A standard reputation system falls short of being effective given the credence good nature of this market: Patients cannot tell whether a costly major treatment is necessary for their recovery even after the service is completed. This type of information asymmetry creates substantial incentives for physicians to overtreat. I propose a novel solution to this problem by combining two important market mechanisms: patient search and a physician reputation system. The key insight is that physician dishonesty detected through patient search facilitates meaningful reputation-building in repeated interactions. Search cost acts as a moderating factor for reputation. High search cost reduces search frequency, which inhibits the effect of reputation building. I test these mechanisms in a laboratory experiment and find supporting evidence from this sample. The results highlight that accessibility to patient search may improve physician ethical behavior and contribute to more equitable access to healthcare.