Physician vs. Patient Incentives in Prescription Drug Choice

The interactions between patients, physicians and insurers in health markets may incite moral hazard and agency conflicts that drive excess spending.  I design a new test of whether demand-side incentives aimed at the patient, or supply-side policies aimed at the physician, best limit these costs.  Focusing on treatment for depression, I find that two schemes---patient cost sharing and capitation contracts---lead physicians to economize on drug care. Short-run costs fall, but patients relapse at higher rates, particularly when insurers aim incentives at physicians.  I discuss the likely mechanism generating this trade-off and its implication for disease-specific insurance design.