In recent years, decentralization of financial and political power has been perceived as a useful means to improve outcomes of the health care sector. Such reforms are often a result of fashion, rather than being based on knowledge of “what works”. If decentralization is the favored strategy...

We present a model of optimal contracting between a purchaser and a provider of health services when quality has two dimensions. We assume that one dimension of quality is veri?able (dimension 1) and one dimension is not verifiable (dimension 2). We show that the power of the incentive scheme...