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Optimal compensation rule under provider adverse selection and moral hazard

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  • Yaping Wu
  • Yijuan Chen
  • Sanxi Li

Abstract

Although healthcare provider payments have been studied extensively in the literature, little is known about the optimal compensation rule when, in addition to unobservable provider effort (moral hazard), the provider's ability type is also private information (adverse selection). We find that when only provider effort is unobservable, to induce the first‐best outcome the optimal compensation rule requires zero fee‐for‐service. When both provider moral hazard and adverse selection exist, the first‐best outcome will be infeasible. The second‐best compensation rule entails combined use of capitation, fee‐for‐service, and pay‐for‐performance.

Suggested Citation

  • Yaping Wu & Yijuan Chen & Sanxi Li, 2018. "Optimal compensation rule under provider adverse selection and moral hazard," Health Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 509-524, March.
    • Handle: RePEc:wly:hlthec:v:27:y:2018:i:3:p:509-524
    DOI: 10.1002/hec.3590
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    References listed on IDEAS

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    Cited by:

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    3. François Maréchal & Lionel Thomas, 2021. "The impact of medical complications on optimal hospital payment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1144-1173, December.
    4. Zhang, Yanfen & Xu, Qi & Zhang, Guoqing, 2023. "Optimal contracts with moral hazard and adverse selection in a live streaming commerce market," Journal of Retailing and Consumer Services, Elsevier, vol. 74(C).

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