Economic Theory Seminar Series - Francisco Silva (Deakin)

Title:  Diagnostic agency: Mechanism Design versus Information Design (joint with Juan S. Pereyra)

Abstract: We study a diagnostic agency problem in which information acquisition is costly, centrally financed, and privately consumed, creating incentives for agents to over-acquire diagnostic information. Motivated by centralized healthcare, we consider a physician who chooses diagnostic tests and then makes a binary treatment decision. A designer values decision accuracy net of testing costs and can intervene either by controlling treatment decisions (mechanism design) or by designing the information structure (information design). When the designer can regulate only the total amount of diagnostic information, but not the composition of tests, the optimal mechanism distorts ex post treatment decisions: treatment approval requires stronger evidence when more tests are ordered. By contrast, if the designer can fully control the diagnostic information, it is optimal to delegate treatment to the physician as long as reductions in false positives and false negatives are sufficiently close cost substitutes.