The model studies the role of reputation in contracts between providers and purchasers of health care services. The economic literature has examined the case when the demand for health services depends on the quality offered, but because of information asymmetry, we assume that quality is not directly observable by patients. However, patients can obtain information (not perfect) about the provider, i.e. they can observe its reputation. In this paper we suppose that patient demand is influenced by the provider's reputation. The model shows that by a prospective payment contract the purchaser can overcome the quality / cost reducing effort trade off, but optimal levels for all the variables of interest are not achievable. Controlling the payment scheme (fixed price per patient treated) the purchaser can get a second best equilibrium outcome. If the main purchaser's concern is quality, he will obtain that result at the cost of a higher price than in the perfect information scenario. Information asymmetry brings an inefficient solution. Transversality conditions underline the equilibrium outcome when the demand mechanism by reputation is not used: the quality / cost trade off can not be avoided.
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Find related papers by JEL classification: I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
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