Contracting unverifiable quality in healthcare: the importance of political stability for relational contracts

Abstract We consider an infinitely repeated game between a public purchaser of a health service and a semi-altruistic hospital when some quality dimensions of the service are non-contractible. We examine how a Pay-for-Performance Relational Contract (P4P-RC) can induce the hospital to deliver positive unverifiable quality. We find that the optimal conditions for both price and quality of the P4P-RC converge to the first-best, the higher the stability of the interaction between the purchaser and the hospital. Using measures of political stability in Italy as a proxy for a stable interaction, we empirically test the relationship between proxies of healthcare service quality and political stability from 1996 to 2020. We find evidence that unverifiable quality increases with the political stability of the regional governments.