A performance‐based payment: Signaling the quality of a credence good. (15th February 2021)

• Record Type: Journal Article
• Authors: Berg, Nathan; Kim, Jeong‐Yoo; Seon, Ilgyun
• Is Part Of: Managerial and decision economics. Volume 42:Number 5(2021)
• Page Start: 1117
• Page End: 1131
• Publication Date: 2021-02-15
• Subjects: Managerial economics -- Periodicals; Decision making -- Periodicals; Management -- Periodicals; 658.15
• DOI: 10.1002/mde.3295
• Languages: English
• ISSNs: 0143-6570

Abstract

Abstract : 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.