Efficient Liability in Expert Markets

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

Abstract

We study the design of efficient liability in expert markets. An expert may misbehave in two ways: prescribing the "wrong" treatment for a consumer's problem, or failing to exert proper effort to diagnose the problem. We show that under a range of liabilities, the expert will choose the efficient treatment based on his information if the price margins for alternative treatments are close enough. Moreover, a well-designed liability rule motivates the expert to also exert diagnosis effort efficiently. The efficient liability is facilitated by certain restriction on equilibrium prices; unfettered competition between experts, while maximizing consumer surplus, may undermine efficiency.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credence 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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