Efficient Liability in Expert Markets

Chen, Yongmin and Li, Jianpei and Zhang, Jin (2018): Efficient Liability in Expert Markets.

Abstract

When providing professional services, an expert may misbehave by either prescribing ``wrong'' treatment for consumer's problem or failing to exert proper effort to diagnose it. We show that under a range of liabilities the expert will recommend the appropriate treatment based on his private information if markups for alternative treatments are close enough; however, a well-designed liability rule is essential for also motivating efficient diagnosis effort. We further demonstrate that unfettered price competition between experts may undermine the efficient role of liability, whereas either a minimum-price constraint or an obligation-to-serve requirement can restore it.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credence goods, experience goods, experts, liability, diagnosis effort, undertreatment, overtreatment
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; I - Health, Education, and Welfare > I1 - Health > I18 - Government Policy ; Regulation ; Public Health; K - Law and Economics > K1 - Basic Areas of Law > K13 - Tort Law and Product Liability ; Forensic Economics; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production

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