Performance indicators are increasingly used to regulate quality in health care and other areas of the public sector. We develop a model of contracting between a purchaser (principal) and a provider (agent) under the following scenarios: a) higher ability increases quality directly and...

We present a model of optimal contracting between a purchaser and a provider of health services. We assume that providers can increase demand by increasing quality but can also inflate activity through a manipulative effort (upcoding or DRG creep). We derive and compare the optimal price and...