Agent sorting by incentive systems in mission firms: Implications for healthcare and other credence goods markets

Abstract

We develop 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 producing credence goods and the impact on customer outcomes thereafter. The model demonstrates that contracts that constrain maximum earnings (e.g., capitation and salary) will likely reduce the total supply of experts to mission firms but maintain experts who are highly mission-motivated and thereby, improve customer outcomes. We test the model’s predictions with a real-effort laboratory experiment, which varied the contracts offered by a mission firm producing credence goods, holding constant an outside option in a non-mission firm. Our results demonstrate the potential trade-off between labor supply to the mission firm and customer outcomes across the different incentive systems as predicted by our model.