Privatization of Credence Goods : Theory and an Application to Residential Youth Care

@inproceedings{Lindqvist2008PrivatizationOC,
  title={Privatization of Credence Goods : Theory and an Application to Residential Youth Care},
  author={Erik Lindqvist},
  year={2008}
}
This paper analyzes public sector contracting of credence goods, i.e., services for which the producer has private information whether a certain treatment is needed or not. I develop a model where a credence good is supplied by an agent who can invest in quality and exert e¤ort to reduce costs. If quality is important but non-contractible, public agencies cannot commit to contracts with private …rms that induce a truthful diagnosis. Privatization therefore increases costs due to overtreatment… CONTINUE READING

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