Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 07/08: Multitasking, Quality and Pay for Performance

Oddvar M. Kaarbøe () and Luigi Siciliani ()
Additional contact information
Oddvar M. Kaarbøe: University of Bergen, Department of Economics, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway
Luigi Siciliani: Department of Economics and Related Studies, and Centre for Health Economics, University of York, Postal: Heslington, York, YO10 5DD, United Kingdom;

Abstract: 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 veri?able (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.

Keywords: quality; altruism; pay for performance.

JEL-codes: D82; I11; I18; L51

37 pages, March 23, 2011

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