A performance‐based payment: Signaling the quality of a credence good

Nathan Berg, Jeong-Yoo Kim and Ilgyun Seon

Managerial and Decision Economics, 2021, vol. 42, issue 5, 1117-1131

Abstract: We consider credence goods. A typical example of a credence good is an expert service. Experts often offer rebates contingent on their client's failure or bonus payments contingent on their client's success. This paper provides a different rationale for performance‐based payments than reducing moral hazard. We show that a performance‐based payment can be a signal of the seller's ability. Due to different success rates across expert abilities, a high‐ability expert can commit to offering larger indemnity payments contingent on a client's failure or smaller bonus payments contingent on a client's success. Thus, high quality is signaled by performance‐based pricing.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:42:y:2021:i:5:p:1117-1131

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