# **1 Introduction**

Healthcare is a credence good with substantial information asymmetries between patients and providers. This makes it difficult for patients to determine the quality of care they have received, and it is widely believed therefore that unregulated market-based delivery of healthcare is socially undesirable (Arrow, 1963)<sup>1</sup> . Further, if optimal care requires the potential denial of services that patients value (such as steroids or antibiotics), marketbased healthcare may be over-responsive to demand, leading to socially inefficient provision (Prendergast, 2003). Partly as a result of these considerations, the default policy approach to delivering healthcare for the poor in most low-income countries is through free or nominallypriced medical care in publicly-run facilities staffed by qualified doctors and nurses, who are paid a fixed salary (World Bank, 2003).

However, a majority of households in low-income countries choose to visit fee-charging healthcare providers in the private sector, whose market share exceeds 70 percent in rural India (the focus of our study).<sup>2</sup> This is surprising for two reasons. First, private healthcare providers in India face little de facto regulation and most have no formal medical training (Rohde and Viswanathan, 1995; Banerjee, Deaton and Duflo, 2004; CPR, 2011). Second, while the high use of the private sector could, in part, reflect the absence of public options, this cannot be the only explanation. In our data from rural India, the private sector share of primary care visits (constructed from a household census) is 80 percent even in markets with a qualified public doctor offering free care through public clinics, with more than 60 percent of these visits to private providers with no formal qualifications.

The high market share of unqualified private healthcare providers raises a number of questions about the functioning of healthcare markets in low-income settings. First, why would people choose to pay for care from (mostly) unqualified providers when public clinics are staffed with qualified doctors who offer care at a much lower price? Second, how does the quality of care received vary across public and private healthcare providers? Third, what does an unregulated healthcare market reward and how does this compare with the regulated public sector? Specifically, to what extent are prices in the market and wages in the public sector correlated with quality of care? Answers to these questions have been limited by the

> 1 _It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”_ Kenneth J. Arrow (1963)

> 2The market share of private providers is high in many low-income countries: Data from the DHS show that 50 percent of households seeking pediatric outpatient care in Africa and 70-80 percent in India visit the private sector with little variation over the 20 years that these surveys have been collected (DHS, 2007; Grepin, 2014). The World Health Surveys provide a more complete (but somewhat outdated) picture by including adult morbidity and here, the numbers vary from 30 percent in Sub-Saharan Africa to between 70 and 80 percent in India (Wagstaff, 2013).

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