Asymmetric information, agency problems, and advertising: Empirical essays on the prescription drug market

The dissertation empirically analyzes economic agents' behavior in the prescription drug market where asymmetric information prevails. Chapter 1 analyzes physicians' agency problems in Japan where doctors can make profits by dispensing drugs. One concern is that the doctor may choose drugs based not on efficacy, safety or cost, but on the extent of the profit margin. Excessive prescriptions may also result because the physician earns more profits by dispensing more drugs. These are common issues in expert services where the appropriateness of the expert's action is difficult to observe. Exploiting the advantages of Japanese data, where I observe the physician's profit margin for each drug, I show that the profit margin indeed affects physician's choices significantly. Moreover, counterfactual experiments show that the economic impact of the physician's margin is quite large. In addition, I find that the physician behaves differently depending on the patients' insurance status. The findings suggest that polices that improve both demand and supply side incentives may be useful to improve efficiency in this market.; Chapter 2 analyzes firms' decisions to advertise ethical drugs. Since 1997, due to the relaxation of advertising regulations, U.S. pharmaceutical firms can use product-specific TV commercials to promote their prescription drugs. As a result, direct-to-consumer (DTC) advertising on ethical drugs has skyrocketed, and this has created a major controversy over the role of DTC advertising. Proponents argue that DTC advertising is beneficial for consumers because it informs potential patients about the existence of drugs that they may not have heard of. Little is known, however, how firms responded to the policy change and, as a result, what kind of information is transmitted to consumers. Using brand-level advertising expenditure data, reduced form advertising equations are estimated. Estimation results suggest that drugs that are new, high quality and for under-treated diseases are more frequently advertised. In addition, the level of advertising appears to decrease as both generic and therapeutic competition gets intense. Over all, the results are consistent with the view that DTC ads are informative. Firms appear to advertise drugs whose information may be beneficial to consumers but scarce under advertising regulations.