Demand inducement as cheap talk.

The doctor-patient interaction is analysed in a game of cheap talk. Causes and consequences of imperfect agency are examined. One form of imperfect agency, supplier-induced demand, is a feature of neologism proof equilibria with some parameter values but not with others. The model is used to evaluate two tests that have been used to test for the existence of supplier-induced demand. The analysis suggests that the two tests, which compare the medical utilization of informed and uninformed consumers, are not valid. Copyright 1999 John Wiley & Sons, Ltd.