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Expert Costs and the Role of Verifiability

Li, Jianpei and Ouyang, Yaofu (2016): Expert Costs and the Role of Verifiability.

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We study a credence goods market in which an expert holds private information about his treatment cost besides his superior knowledge about the nature of the consumer’s problem. Under the assumption of liability, cheating may occur through overcharging—a price for major treatment is charged while a minor treatment is provided, while under liability and verifiability, cheating can only occur through costly overtreatment of minor problems. Neither liability nor liability and verifiability achieves socially efficient outcome. Adding verifiability improves social welfare because it increases the probability that a major problem is repaired and the associated overtreatment cost is dominated by the gain from more problems being repaired.

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