A signalling theory of excessive technological adoption

Technology adoption has been identified as one of the main elements behind the growth of health care expenditures. It has been argued that the health insurance arrangements in the US justify, to a certain extent, the technology-driven rise in costs. Moreover, it eases the adoption of less cost-effective procedures and devices. This paper presents an additional argument by which excessive technology investments may occur: providers of care invest in technology as a way to ‘signal’ their intrinsic (and unobservable) quality. Providers face the option of adopting a new technology. The decision of adoption in itself may convey information about the provider's quality: for example, patients conjecture that providers who display newer technology are of higher quality. Providers, being aware of this, may invest in technology to reveal themselves as high quality. Thus, technology adoption could result only from the desire to attract patients. The investment is self-defeating in the sense that if all providers invest, no information about quality is transmitted to patients. We evaluate the argument in a context of demand for health care services where patients have initially no information about the quality of different providers. We show that an incentive to invest as a way to signal quality may or may not lead to overinvestment. It is also possible that only some providers invest. They reveal themselves as high quality providers. The analysis suggests that the argument is more important for some services than for others. Overall, an additional argument for overinvestment in technology in some circumstances is provided.