AIDS policy and psychology: a mechanism-design approach.

Economic theorists have given little attention to health-related externalities, such as those involved in the spread of AIDS. One reason for this is the critical role played by psychological factors, such as fear of testing, in the continued spread of the disease. We develop a model of AIDS transmission that acknowledges this form of fear. In this context we design a mechanism that not only encourages testing but also slows the spread of the disease through voluntary transmission. Our larger agenda is to demonstrate the power of psychological incentives in the public health arena.