1998 Reports

Institutional Solutions to the Principal-Agent Problem in African Health Care

Leonard, Kenneth L.; Leonard, David K.

Free markets for health care in Africa do not function properly, in that patients exhibit willingness to pay for health care and yet practitioners are unable to sell their services. It is widely acknowledged that health markets everywhere are troubled with imperfect information. Therefore it is no surprise that free markets and spot contracts do not lead to an efficiently functioning market for health care. When issues of agency are not resolved we find practitioners specializing in the sale of pharmaceuticals but not using their skills as diagnosticians. Mechanisms that can reduce agency cost are beneficial to both patients and practitioners. This paper draws on theory and empirical evidence to examine what institutions are necessary to solve the problems of imperfect information in this context. We dismiss government regulation because the regulatory capacity does not exist in most African countries. Theory suggests that self-regulation by professional bodies should arise as privatization continues. Empirical evidence, however, suggests that this conclusion is overly-optimistic. On the other hand, referral networks perform much the same function but do not require centralized control. The most successful institution for the delivery of quality medical care in Africa is that of independent, pre-existing value-based organizations (missions) and we suggest their choice of institutional form has contributed to their success.