Multi-tasking, quality and pay for performance

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: (i) the provider is (at least to some extent) altruistic; (ii) one dimension of quality is verifiable (dimension 1) and one dimension is not verifiable (dimension 2); (iii) the two quality dimensions can be either substitutes or complements. Our main result is that setting the price equal to the marginal benefit of the verifiable quality dimension can be optimal even if the two quality dimensions are substitutes.

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