MORAL HAZARD: PARTNERSHIPS, INSURANCE, AND HEALTH CARE

This dissertation consists of three essays, each of which considers a different aspect of the moral hazard problem.; “Efficiency in Partnerships with Joint Monitoring” examines deterministic partnerships with at least three partners where one partner observes the actions taken by a subset of the other partners and issues a report conditional on that observation. No other partner has any additional information. Whenever the observing partner can see the action chosen by at least one other partner, the efficient action vector can be sustained in a perfect Bayesian equilibrium by a sharing rule that exhibits budget balance and limited liability.; “Moral Hazard with Persistent Actions and Learning” considers a two-period principal-agent model in which the agent's effort choice affects the distribution of outcomes throughout the game and the parties learn over time about the agent's risk classification. It is shown that the optimal long-term contract may involve overinsurance in the last period, giving the agent more utility following a loss than following no loss, even when the initial distribution satisfies the Monotone Likelihood Ratio Condition. It is also shown that long-term contracts Pareto dominate short-term contracts because long-term contracts make better use of the information provided by the second period's outcome and are better able to smooth the agent's incentives over time.; “Stochastic Diagnosis and Incentive Compatible Sorting in Health Care: An Agency Approach” studies the relationship between a patient, insurer, and doctor. Patients have one of two diseases. The doctor receives a private, nonverifiable signal of the patient's condition and must prescribe one of two possible treatments. The market for insurance is perfectly competitive. When the roles of insurer and doctor are combined into a single player (as in an HMO), the equilibrium insurance plan departs from the social optimum because the HMO can only commit to a non-least-cost treatment by imposing risk on the patient. In contrast, when the insurance and treatment roles are separate, as in fee-for-service insurance, the insurance company can designate wages for the physician that implement in equilibrium the socially optimal insurance plan.