Non-profit firms in healthcare - Why are non-profit firms so popular? - Explanation 2: contract failure

3 important questions on Non-profit firms in healthcare - Why are non-profit firms so popular? - Explanation 2: contract failure

What were the reasons for principal-agent problems in hospitals?

  1. Asymmetric information
  2. conflict of interests

What four things do complete contracts require?

  • All available information and all future contingencies are included in the contract.
  • all observable information is verifiable by a third party
  • Compensation is based on measured performance
  • Principal has to devise an incentive scheme to motivate agents to act in their interest.

Are complete contracts feasible in hospitals? Why yes/no?

No they are not feasible. Due to incomplete information on quality.

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