Expert Costs and the Role of Verifiability

Li, Jianpei and Ouyang, Yaofu and Zhang, Wanzhu (2022): Expert Costs and the Role of Verifiability.

Abstract

We analyze a credence goods market where the expert may have a high or low cost in repairing a major problem, under the assumptions that i) the expert is liable for the outcome of the treatment (liability), and ii) the type of treatment is (or is not) verifiable by the consumer (verifiability). We show that, with just liability, an inefficiency arises because not all major problems are resolved in equilibrium. With both verifiability and liability, another inefficiency arises because minor problems are sometimes fixed through costly major treatments (overtreatment). Adding verifiability improves social welfare because a major problem is resolved with a higher probability, and the gain dominates wasteful overtreatment costs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credence Goods, Treatment Costs, Liability, Verifiability
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production

References

[1]Alger, I. and F. Salanie ́ (2006): “A Theory of Fraud and Overtreatment in Expert Markets,” Journal of Economics and Management Strategy, 15, 853–881.

[2] Balafoutas, L. and R. Kerschbamer (2020): “Credence Goods in the Literature: What the Past Fifteen Years Have Taught Us About Fraud, Incentives, and the Role of Institutions,” Journal of Behavioral and Experimental Finance, 26, 100285.

[3] Bester, H. and M. Dahm (2018): “Credence Goods, Costly Diagnosis, and Subjective Evaluation,” Economic Journal, 128, 1367–1394.

[4] Chen, Y., J. Li, and J. Zhang (2022): “Efficient Liability in Expert Market,” International Economic Review, 63, 1717–1744.

[5] Cho, I-K. and D. M. Kreps (1987): “Signaling Games and Stable Equilibria,” Quarterly Journal of Economics, 102, 179–221.

[6] Darby, M. and E. Karni (1973): “Free Competition and the Optimal Amount of Fraud,” Journal of Law and Economics, 16, 67–88.

[7] Dulleck, U., J. Gong, and J. Li (2015): “Contracting for Infrastructure Projects as Credence Goods,” Journal of Public Economic Theory, 17, 328–345.

[8] Dulleck, U. and R. Kerschbamer (2006): “On Doctors, Mechanics, and Computer Specialists: The Economics of Credence Goods,” Journal of Economic Literature, 44, 5–42.

[9] Dulleck, U. and R. Kerschbamer (2009): “Experts vs. Discounters: Consumers Free-Riding and Experts Withholding Advice in Markets for Credence Goods,” International Journal of Industrial Organization, 27, 15–23.

[10] Dulleck, U., R. Kerschbamer, and M. Sutter (2011): “The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition,” American Economic Review, 101, 530–559.

[11] Emons, W. (1997): “Credence Goods and Fraudulent Experts,” Rand Journal of Economics, 28, 107-119.

[12] Emons, W. (2001): “Credence Goods Monopolists,” International Journal of Industrial Organization, 19, 375-389.

[13] Fong, Y. (2005): “When do Experts Cheat and Whom do They Target?” Rand Journal of Economics, 36, 113–130.

[14] Fong, Y., T. Liu, and D. J. Wright (2014): “On the Role of Verifiability and Commitment in Credence Goods Market,” International Journal of Industrial Organization, 37, 118–129.

[15] Frankel, A., and M. Schwarz (2014): “Experts and Their Records,” Economic Inquiry, 52, 56–71.

[16] Hilger, N. (2016): “Why Don’t People Trust Experts?,” Journal of Law and Economics, 59, 293– 311.

[17] Hyndman, K. and S. Ozerturk (2011): “Consumer Information in a Market for Expert Services,” Journal of Economic Behavior and Organization, 80, 628–640.

[18] Jost, P., S. Reik, and A. Ressi (2021): “The Information Paradox in a Monopolist’s Credence Goods Market,” International Journal of Industrial Organization, 75, 102694.

[19] Liu, F., A. Rasch, M. Schwarz, and C. Waibel (2020): “The Role of Diagnostic Ability in Markets for Expert Services,” CESifo Working Paper No. 8704.

[20] Liu, T. (2011): “Credence Goods Markets with Conscientious and Selfish Experts,” International Economic Review, 52, 227–244.

[21] Pitchik, C. and A. Schotter (1987): “Honesty in a Model of Strategic Information Transmission,” The American Economic Review, 77, 1032-1036.

[22] Wolinsky, A. (1995): “Competition in Markets for Credence Goods,” Journal of Institutional and Theoretical Economics, 151, 117-131.