Optimal Incentive Schemes for Altruistic Providers

We study the optimal design of incentive schemes in the presence of adverse selection and altruistic providers. We assume that providers differ in efficiency, are partially altruistic, and have limited liability. Three types of separating equilibrium emerge. (1) For low levels of altruism the quantity of the efficient and inefficient types is distorted upwards and downwards, respectively; the inefficient type makes zero profits. (2) For moderate levels of altruism the first best is attained: no distortions and profits are zero. (3) For high levels of altruism the quantity of the inefficient type is distorted upwards, and the quantity of the efficient type is distorted either upwards or downwards; the efficient type makes zero profits. Our main result is that the first best can be obtained for some values of altruism, but not necessarily for the highest values. The purchaser is better off with providers with moderate rather than high altruism.