Recent advances in the application of economic theory suggest that differences in the institutional and contractual arrangements used to organize and control economic activity provide individuals with different opportunities for gain and thus affect their choices systematically. The evidence supports the usefulness of the analysis. This approach is summarized within the context of health care. The effect of alternative health-care institutions is then examined by deriving some implications and noting some of the evidence, almost entirely from the USA, regarding the behavior of patients, physicians and hospital administrators. Recent empirical work, fueled by natural as well as by controlled experiments designed to test the effects of particular institutions (e.g. coinsurance), is providing a stronger theoretical and empirical base for understanding the consequences of alternative institutions not only on individuals' choices regarding health care, but on all choices. It is also permitting more informed design and choice of institutions.
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