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Designing performance-based incentives when service providers compete for users to help

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  • Kevin C. Corinth

Abstract

Social service providers such as teachers, healthcare providers and homeless shelters receive trillions of dollars each year to help people. Recently, policymakers and other funders have attempted to obtain better outcomes by implementing performance-based incentive schemes that pay more money to higher performing providers. In this paper, I develop a simple model of this incentive design problem with a distinguishing feature—providers compete for users to help by adjusting service quality. I characterize a broad class of incentive schemes that elicit efficient service quality, and I show that popular incentive schemes (including value-added and pay-for-percentile schemes) are generally suboptimal and can have perverse distributional consequences, even when all characteristics of individuals are observed. I discuss implications for performance-based incentives in education and healthcare.

Suggested Citation

  • Kevin C. Corinth, 2016. "Designing performance-based incentives when service providers compete for users to help," AEI Economics Working Papers 887508, American Enterprise Institute.
    • Handle: RePEc:aei:rpaper:887508
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    References listed on IDEAS

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    1. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2003. "Is More Information Better? The Effects of "Report Cards" on Health Care Providers," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 555-588, June.
    2. Esther Duflo & Rema Hanna & Stephen P. Ryan, 2012. "Incentives Work: Getting Teachers to Come to School," American Economic Review, American Economic Association, vol. 102(4), pages 1241-1278, June.
    3. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
    4. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    5. David Cutler & Jonathan S. Skinner & Ariel Dora Stern & David Wennberg, 2019. "Physician Beliefs and Patient Preferences: A New Look at Regional Variation in Health Care Spending," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 192-221, February.
    Full references (including those not matched with items on IDEAS)

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    • A - General Economics and Teaching

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