from market incentives. On the other hand, if the default effort level is low, the benefits of higher effort in the private sector (and the resulting increase in precision of the posterior) may outweigh the costs of over-treatment under market incentives.

Our methodological contribution helps address the fundamental problem of inferring quality in healthcare, where the optimal action is patient and condition specific, and inefficiencies include under-treatment, over-treatment, or both (Pauly, 1980). Specifically, there are four advantages to the use of unannounced SPs relative to existing measures in the literature, which are based on tests of provider knowledge, observation of medical practices or analysis of prescriptions.<sup>5</sup> First, the use of SPs ensures a common set of patient and illness characteristics, which limits concerns about differential patient sorting across clinics on the basis of personal or illness characteristics, as might be the case when observing real patient-provider interactions. Second, the SP method allows us to objectively score the quality of care using conditionspecific metrics (checklist completion, diagnosis, and treatment) because we know the actual illness being presented and the optimal care associated with the case. In the case of real observations, we would observe only the presenting symptoms and would have to speculate about the true underlying illness. Third, we are able to observe prices charged for completed transactions, which allows us to study to what extent the unregulated market rewards quality, which improves upon audit studies in other settings that obtain price quotes but do not complete the purchase.<sup>6</sup> Finally, Hawthorne effects are not a concern in the SP context because providers do not know that they are being observed.

Substantively, the advances in measurement above combined with our ability to observe the _same_ doctor across public and private practices allow us to provide the first direct comparison of the quality of care across public and private sectors.<sup>7</sup> We also provide the first evidence on how market prices for healthcare behave in an unregulated setting and show that there is a positive correlation between price and checklist completion/correct treatment, but also between price and unnecessary treatments. This suggests that in unregulated markets

> 5Medical vignettes, which measure provider knowledge, allow for standardization of case-mix, but do not measure provider practice, which has been shown to differ markedly from provider knowledge in multiple contexts (Rethans et al., 1991; Leonard and Masatu, 2005; Das and Hammer, 2007).

> 6For instance, first price offers can be very different from the price of the completed transaction if the distribution of willingness to pay is different across populations. See for instance, Ayres and Siegelman (1995) and Goldberg (1996) for an example of how the lack of completed sales data can lead to misleading conclusions in audit studies of car sales. In our case, the “sale” is always completed as the SP leaves only after the provider has completed the interaction and the price has been paid.

> 7Our approach extends a literature testing for moral hazard in agricultural labor markets by comparing worker effort and output under different contractual arrangements (Shaban, 1987; Foster and Rosenzweig, 1994 _a_ , _b_ ) to a credence good setting where output is harder to measure for both customers and researchers, and where there is substantial direct provision of the good by the public sector.

5