Information problems are everywhere

• Healthcare
• Education (state funding decisions, college ratings, etc.)
• Finance (credit ratings, bond ratings, etc.)
• Food (nutrition labels, etc.)
• Any product really!

Specifically in healthcare…

• Hospital quality (pay for performance, hospital choice/star ratings)
• Health insurance (Medicare Advantage star ratings)
• HHA, SNF, Hospice (star ratings)
• Physician quality (physician compare, report cards)
• Google reviews, yelp, etc. for all of the above

Background, Dranove and Jin (2010)

• Quality often unknown or uncertain ex ante
• Consumers rely on other information to infer quality
• Quality disclosure provides consumers with direct information on product or service quality (unlike implied quality via price, brand, etc.)
• Dranove and Jin (2010) discuss:
  • Full (and voluntary) disclosure
  • Barriers to full disclosure
  • Third-party disclosure
  • Empirical evidence

Full (and Voluntary) Disclosure

Under what conditions might all firms voluntarily disclose quality information (e.g., unraveling)?

• Products identical except for single vertical dimension
• Sellers have complete and private quality informatioin
• Disclosure is costless
• Monopoly or competitive market
• Homogeneous consumers with rational expectations about undisclosed quality
• All quality disclosure is public information

Barriers to Full and Voluntary Disclosure

• Disclosure Costs: Even minimal costs can prevent sellers from disclosing
• Market Structure: Duopoly and oligopoly markets may see strategic non-disclosure as a competitive tool
• Consumer Response: Lack of consumer attention or understanding can diminish the incentives for disclosure
• Heterogeneous Preferences: When consumer preferences vary widely, the impact of disclosure on market choices becomes unpredictable
• Unobservable Quality Attributes: In some markets, quality cannot be easily measured or observed

Third-party Disclosure

If voluntary disclosure won’t work, third-party entities may verify and disseminate information about product quality. Key issues for third-party disclosure include:

• Key issues:
  • Potential conflicts of interest if funded by sellers
  • Ensuring unbiased and accurate reporting
  • Overcoming information asymmetry without introducing new biases
• Potential effects:
  • Can significantly affect consumer trust and behavior
  • Potential to improve market efficiency by enhancing transparency

Empirical Evidence

• Healthcare: Disclosure of hospital quality metrics influences consumer choices and promotes competition among providers
• Education: School performance reports affect parental choices for their children’s education, leading to shifts in school enrollments
• Finance: Transparency in financial reporting and bond ratings significantly affects investor behavior and market dynamics

Practical Barriers

• Quality Measurement Challenges:
  • Difficulty in accurately measuring and reporting quality across different industries
  • Impact of these challenges on the reliability and effectiveness of disclosure
• Strategic disclosure: Evidence of both improvements in quality and strategic behavior to game disclosure systems (e.g., cream skimming, MA contract loading)
• Certifier Behavior: Potential biases and conflicts of interest that may affect the impartiality of third-party certifiers

Example from Luco (2019)

• Mandatory online price disclosure for retail gasoline in Chile
• Predictions:
  • If consumers use the information, competition will increase and prices will fall
  • If consumers do not access the site, disclosure may facilitate tacit collusion
  • Potential heterogeneity in use across markets, with distributional implications

Model

• Luco (2019) presents a theoretical model of price competition and consumer search
• Shows that disclosure may facilitate coordination and increase prices
  • Depends on the rate in which firms observe deviations from the collusive price and the share of informed consumers

Estimation

• Standard TWFE estimation: \[y_{it} = \beta_{0} + \beta_{1} 1(\text{Website Available})_{it} + \gamma x_{it} + \xi_{i} + \eta_{t} + \epsilon_{it}\]
• There was a rollout of the website, so this is staggered (pre-dates the recent DD stuff on staggered DD)
• Interact disclosure with income and search requests

Findings

• Competition decreases (prices increase) on average
• Higher prices increases for low income and low search areas
• Price decreases in areas with high income and high search

Price Disclosure in Healthcare

• Some small scale studies of price disclosure for specific health insurers or other contexts
• Only large efforts are more recent through CMS price transparency initiatives
• Data poorly formatted and difficult to use, compliance is low
• Turquoise Health claims to have collected and organized these data (haven’t used it myself)