ABSTRACT
The combination of agency and information problems produces interesting economic problems. Moral hazard arises where there is shared information up to the point of selection of an action. The principal does observe the action – only the uncertain ‘pay-off’. The amount to be paid in the case of recovery has to compensate the doctor both for the effort that the doctor has to make and for the risk borne that, despite effort, the patient will die and the doctor will be compensated for the additional effort. Traditional healers in Cameroon are paid according to a ‘contingent payment scheme’ under which payment increases according to the success of the treatment. Financing health service provision through a public provider and a budget mechanism is analytically similar to a flat-rate subsidy – although the assumed objective function of the provider is apparently neither profit maximising nor revenue maximising.
