Insurance in a Market for Credence Goods

We study the impact of variations in the degree 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 pretending to perform inappropriately high treatment levels leading to overcharging patients. Our approach aims on the impact on changes in each, patients' and physicians' incentive structure when the proportional degree of coinsurance varies. It is shown that a higher coinsurance 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.