Abstract: We consider settings in which skilled experts have private, heterogeneous types. Contracts that evaluate experts based on outcomes are used to differentiate between types. However, experts can take unobservable actions to manipulate their outcomes, which may harm consumers. For example, surgeons may privately engage in harmful selection behavior to avoid risky patients and hence improve observed performance. In this paper we solve for optimal evaluation contracts that maximize consumer welfare. We find that an optimal contract takes the form of a scoring rule, typically characterized by four regions: (1) high score sensitivity to outcomes, (2) low score sensitivity to outcomes, (3) tenure, and (4) firing or license revocation. When improvement is possible, an optimal contract for the low quality expert is a fixed-length mentorship program. In terms of methods, we draw upon continuous-time techniques, as introduced in Sannikov (2007). Since our problem involves both adverse selection and moral hazard, this paper features novel applications of continuous-time methods in contract design.

Abstract: We study the repeated two-player Prisoners' Dilemma with imperfect private monitoring. We assume no communication and no public randomization device. We prove that there exists an equilibrium with payoffs arbitrarily close to efficient. Unlike previous works on private monitoring, which have confined attention to signals that are either almost perfect or conditionally independent, we allow for both imperfect and correlated signals.

* an old version with partial results is here.

Abstract: We consider the market for prescription drugs. A government subsidy that takes the form of traditional insurance will put upward pressure on prices of drugs supplied by monopolists and may not be effective in reducing deadweight losses. In addition, such a subsidy is subject to large risks and adverse selection that make private implementation difficult to sustain. In this paper we describe a government-funded market-driven mechanism for procurement of prescription drugs that leads to near efficient outcomes. The design leverages the very low marginal cost structure of drugs as well as their unique consumer demand structure. Even in a world where none of the drugs are substitutes, there exists a market mechanism in which almost all drugs are available to all people (minimizing deadweight loss). Also, payments to pharmaceutical companies are determined by the market and equal to what the companies would earn by selling at monopoly profit-maximizing prices. Furthermore, from a social perspective, the described mechanism features more appropriate incentives for innovation of both substitutes and new treatments.