Handbook of Healthcare Analytics

15 Game Theory and Information Economics

Tinglong Dai

Johns Hopkins University

15.1 Introduction

Game theory provides a powerful analytical basis for modeling and predicting human interactions (e.g., between a patient and a physician). Information economics, on the other hand, is a tool that characterizes how information, or lack thereof, drives decision making. Jointly, these two tools—when obvious conclusions cannot be drawn by mere observation or intuition—help provide a rigorous and scientific understanding of strategic behaviors of producers, consumers, mediators, and regulators of various goods and services instrumental to the functioning of our economy and society. Needless to say, underlying both tools is the assumption that the decision‐makers are rational and strategic—possibly to a limited extent—and that they make utility‐maximizing calculations by anticipating the other parties are rational and strategic, too.

Perhaps surprising to some, over the brief histories of both tools, starting from high‐level descriptive narratives in their early days to a coherent and rigorous set of norms and standards now, much of their theoretic innovation has been and continues to be inspired by the healthcare industry. Below are several examples:

1. Market for healthcare services. Among the earliest and most instrumental work in developing what is later known as the “contract theory,” a seminal paper, entitled “Uncertainty and the Welfare Economics of Medical Care,” by Arrow ...