RESEARCH ARTICLE
Optimal compensation rule under provider adverse selection and moral hazard
Yaping Wu,
Yijuan Chen,
Sanxi Li,
Yaping Wu
Institute of Economics and Finance, Nanjing Audit University, Nanjing, China
Search for more papers by this authorYijuan Chen
Research School of Economics, Australian National University, Canberra, Australia
Search for more papers by this authorCorresponding Author
Sanxi Li
School of Economics, Renmin University of China, Beijing, China
Correspondence
Sanxi Li, School of Economics, Renmin University of China, Beijing 10072, China.
Email: [email protected]
Search for more papers by this authorYaping Wu,
Yijuan Chen,
Sanxi Li,
Yaping Wu
Institute of Economics and Finance, Nanjing Audit University, Nanjing, China
Search for more papers by this authorYijuan Chen
Research School of Economics, Australian National University, Canberra, Australia
Search for more papers by this authorCorresponding Author
Sanxi Li
School of Economics, Renmin University of China, Beijing, China
Correspondence
Sanxi Li, School of Economics, Renmin University of China, Beijing 10072, China.
Email: [email protected]
Search for more papers by this authorSummary
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.
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