DP6911 Multitasking, Quality and Pay for Performance
|Author(s):||Oddvar Martin Kaarboe, Luigi Siciliani|
|Publication Date:||July 2008|
|Keyword(s):||altruism, pay for performance, quality|
|JEL(s):||D82, I11, I18, L51|
|Programme Areas:||Industrial Organization|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6911|
We present a model of optimal contracting between a purchaser and a provider of health services when quality has two dimensions. We assume that one dimension of quality is verifiable (dimension 1) and one dimension is not verifiable (dimension 2). We show that the power of the incentive scheme for the verifiable dimension depends critically on the extent to which quality 1 increases or decreases the provider's marginal disutility and the patients' marginal benefit from quality 2 (i.e. substitutability or complementarity). Our main result is that under some circumstances a high-powered incentive scheme can be optimal even when the two quality dimensions are substitutes.