Institutional Design for Credence Goods: Can the Existence of Financial Incentive be Problematic? Evidences from Child Birth System of Bangladesh

The contribution of this paper may be twofold: one is practical implication and the other one may be theoretical. The ‘practical’ implication is related with the identification of the problem - physicians from the private... [ view full abstract ]

The contribution of this paper may be twofold: one is practical implication and the other one may be theoretical. The ‘practical’ implication is related with the identification of the problem - physicians from the private clinics in Bangladesh tend to go for overtreatment, i.e. mostly adopt cesarean delivery for child birth and that may not be based on medical ground but may be due to profit motive triggered by financial incentives. The higher differences of the volume of cesarean delivery (5-10 times) between lower (government and NGOs health facilities) and higher (private clinics) incentive based institutions may be indicative of this problem. The government and NGO physicians have lower incentive than the private clinics to go for overtreatment as their earnings usually are not related with the earning from the provided services, but for the private clinics, it does. This finding may also have theoretical implications; i.e. having/introducing financial incentive based system for the service provider of the credence goods to induce them for more productivity may be problematic; especially in the developing countries. Next finding of the study indicates that just the competition may not be sufficient enough to reduce the problem of credence goods; i.e. just the increase of competition does not produce linear decrease of the problem of overtreatment. However, it appears that absolute monopoly (existence of one private clinic) may be worse than competition (many private clinics). Because, the study indicates that the places which have monopoly, those have higher incidence of 100 percent cesarean delivery compare to others (except two places out of 171 places). The existence of alternative types of service provider (like NGOs which have different institutional design) may also contribute to reduce the problem of overtreatment in the private clinics. Here, free or lower cost of health services from NGOs may contribute. Due to the lower search cost at the NGO health facilities, the net gain may be higher than having a cesarean delivery which may motivate one to go for search option. However, the study does not find any statistical significant relationship with the government health facilities; probably the poor facilities and poor image or even the variation of service recipient group (may be only poorer section receive service there who usually do not go to private clinic) may contribute here but it needs to be investigated further for confirmation.