Agent Sorting by Incentive Systems in Mission Firms: Implications for Health Care and Other Credence Goods Markets

Abstract

Intrinsic motivation and monetary incentives affect an expert's choice of firm, and thus also the performance of the firm. These effects are particularly important for consumers of credence goods in mission industries, where experts perform duties that align with their own personal belief systems and quality cannot be directly incentivized. In this environment, different contract designs may attract experts with different intrinsic motivations to select into a mission industry, and therefore likely play a significant role in determining the quantity and quality of labor supply. We use a model of expert decision-making to predict how three different contract designs (capitation, fee-for-service, and salary) affect experts' decisions to enter mission firms with credence goods and the performance of the firm thereafter. The model demonstrates that contracts that constrain maximum earnings (e.g., capitation and salary) will likely reduce supply, but maintain experts who are highly mission motivated and thereby, increase industry performance. To test the model’s ability to predict the marginal effect of limiting available contracts in a mission firm on expert preferences and performance we constructed a laboratory experiment. Our results demonstrate the potential for a tradeoff between labor supply and quality of performance across different contract designs.