Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/314725 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11686
Publisher: 
CESifo GmbH, Munich
Abstract: 
We study a situation where physicians differing in their degree of altruism exert a diagnostic effort before deciding whether to test patients to determine the most appropriate treatment. The diagnostic effort generates an imperfect private signal of the patient's type, while the test is perfect. At the laissez-faire, physicians exert insufficient diagnostic effort and rely excessively on testing. We show that the first-best allocation (where the degree of altruism is observable) can be decentralized by a payment scheme composed of i) a pay-for-performance (P4P) part based on the number of correctly treated patients to ensure the provision of the optimal diagnostic effort, and of ii) a capitation part to ensure both the optimal testing decision and the participation of physicians. When physicians differ in their (non-observable) degree of altruism, the optimal contract is pooling rather than separating, an instance of non-responsiveness. Its uniform P4P component induces more altruistic physicians to exert a larger diagnostic effort while, to incentivize the second-best optimal testing decision, its capitation component must be contingent on the test cost.
Subjects: 
diagnostic risk
personalized medicine
non-responsiveness
capitation payment
pay-for-performance
hidden action and hidden information
JEL: 
D82
D86
I18
Document Type: 
Working Paper
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