Incentivizing Physicians’ Diagnostic Effort and Test with Moral Hazard and Adverse Selection

David Bardey, Philippe De Donder and Marie-Louise Leroux

Cahiers de recherche / Working Papers from Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics

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.

Keywords: diagnostic risk; personalized medicine; non-responsiveness; capitation payment; pay-for-performance; hidden action and hidden information. (search for similar items in EconPapers)
JEL-codes: D82 D86 I18 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cta and nep-hea
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Related works:
Working Paper: Incentivizing Physicians’ Diagnostic Effort and Test with Moral Hazard and Adverse Selection (2025)
Working Paper: Incentivizing Physicians’ Diagnostic Effort and Test with Moral Hazard and Adverse Selection (2025)
Working Paper: Incentivizing Physicians' Diagnostic Effort and Test with Moral Hazard and Adverse Selection (2024)
Working Paper: Incentivizing Physicians' Diagnostic Effort and Test with Moral Hazard and Adverse Selection (2024)
Working Paper: Incentivizing Physicians' Diagnostic Effort and Test with Moral Hazard and Adverse Selection (2024)
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