Competition Kills Cavities

We've probably all heard about an application of the principle agent problem. The problem arises when the interests of two parties involved in a transaction differ. Take, for example, you and your dentist. Your interest is to have a healthy mouth. Your dentist's interest is to have a healthy business. Unfortunately, your unhealthy mouth provides the dentist with a healthy demand for dentistry.

Now if she is the only dentist in town, this is a problem. She, however nice and compassionate, has an interest in keeping you coming back. This may not lead to out and out sabotage of you mouth but it could lead to less attention and commitment to stellar service.

If there are other dentists in town, the principle-agent problem is mitigated to a certain degree. Now your dentist must keep you happy enough to keep you from switching to another local dentist. However, she still cannot do perfect work because she needs you to come back. But you will get better service.