Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322720 
Year of Publication: 
2007
Series/Report no.: 
Discussion Papers Series No. 07-08
Publisher: 
Utrecht University, Utrecht School of Economics, Tjalling C. Koopmans Research Institute, Utrecht
Abstract: 
This paper distinguishes between two scenarios for the expert-client encounter. In the cure scenario, the client does not know whether a loss can be recovered. In the prevention scenario, the client faces a threat but does not know whether this threat is real enough to justify preventive action. The client wants to induce the expert both to give an accurate diagnosis and to put appropriate effort into cure or prevention. It is shown that in the cure scenario, a contingent fee solves both these incentive problems. In the prevention scenario, however, putting up with low effort makes it easier to get an accurate diagnosis, and the use of contingent fees should be limited. These results are interpreted as providing a rationale for observed exceptions to legal and ethical restrictions on the use of contingent fees. Indeed, such exceptions are often granted for cases that fit the cure scenario.
Subjects: 
Prevention
Cure
Expert Incentives
Principal-Agent Models
Document Type: 
Working Paper

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