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A performance‐based payment: Signaling the quality of a credence good
Author(s) -
Berg Nathan,
Kim JeongYoo,
Seon Ilgyun
Publication year - 2021
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3295
Subject(s) - payment , credence , credence good , commit , moral hazard , business , actuarial science , quality (philosophy) , microeconomics , incentive , economics , computer science , information asymmetry , finance , philosophy , epistemology , database , machine learning
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.