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Evaluating Skilled Experts: Optimal Scoring Rules for Surgeons

  • Kyna Fong

    (Stanford University)

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    We consider settings in which skilled experts have private, heterogeneous types. Contracts that evaluate experts based on outcomes are used to differentiate between types. However, experts can take unobservable actions to manipulate their outcomes, which may harm consumers. For example, surgeons may privately engage in harmful selection behavior to avoid risky patients and hence improve observed performance. In this paper we solve for optimal evaluation contracts that maximize consumer welfare. We find that an optimal contract takes the form of a scoring rule, typically characterized by four regions: (1) high score sensitivity to outcomes, (2) low score sensitivity to outcomes, (3) tenure, and (4) firing or license revocation. When improvement is possible, an optimal contract for the low quality expert is a fixed-length mentorship program. In terms of methods, we draw upon continuous-time techniques, as introduced in Sannikov (2007b). Since our problem involves both adverse selection and moral hazard, this paper features novel applications of continuous-time methods in contract design.

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    File URL: http://www-siepr.stanford.edu/repec/sip/07-043.pdf
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    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 07-043.

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    Date of creation: Nov 2007
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    Handle: RePEc:sip:dpaper:07-043
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    1. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 53-74, February.
    2. Levine, David & Ely, Jeffrey & Fudenberg, Drew, 2008. "When is Reputation Bad?," Scholarly Articles 3196337, Harvard University Department of Economics.
    3. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
    4. Eduardo Faingold & Yuri Sannikov, 2007. "Reputation Effects and Equilibrium Degeneracy in Continuous Time Games," Levine's Bibliography 122247000000001487, UCLA Department of Economics.
    5. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 853-81, October.
    6. De Jaegher, Kris & Jegers, Marc, 2000. "A model of physician behaviour with demand inducement," Journal of Health Economics, Elsevier, vol. 19(2), pages 231-258, March.
    7. Yuliy Sannikov, 2007. "Games with Imperfectly Observable Actions in Continuous Time," Econometrica, Econometric Society, vol. 75(5), pages 1285-1329, 09.
    8. 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.
    9. Jeffrey C. Ely & Juuso Valimaki, 2002. "Bad Reputation," Discussion Papers 1348, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    10. Asher Wolinsky, 1991. "Competition in a Market for Informed Experts' Services," Discussion Papers 959, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    12. Jaeyoung Sung, 2005. "Optimal Contracts Under Adverse Selection and Moral Hazard: A Continuous-Time Approach," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 1021-1073.
    13. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
    14. Eduardo Faingold & Yuliy Sannikov, 2007. "Reputation Effects and Equilibrium Degeneracy in Continuous-Time Games," Cowles Foundation Discussion Papers 1624, Cowles Foundation for Research in Economics, Yale University.
    15. Cory S. Capps & David Dranove & Shane Greenstein & Mark Satterthwaite, 2001. "The Silent Majority Fallacy of the Elzinga-Hogarty Criteria: A Critique and New Approach to Analyzing Hospital Mergers," NBER Working Papers 8216, National Bureau of Economic Research, Inc.
    16. Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
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