Liability in Markets for Credence Goods

Chen, Yongmin and Li, Jianpei and Zhang, Jin (2017): Liability in Markets for Credence Goods.

Abstract

We study the role of liability in disciplining an expert's behavior in a credence good market. The expert, who can provide two potential treatments for a consumer's problem, may misbehave in two ways: prescribing the "wrong" treatment given his private information, or failing to exert proper effort to diagnose the problem. We show that under a range of liability rules, the expert will choose the efficient treatment based on his information if the price margins for the two treatments are close enough. Moreover, a well-designed liability rule can motivate the expert to choose efficiently both the treatment and the diagnosis effort. This efficiency result continues to hold when the expert's diagnosis effort generates only a noisy signal about the nature of the consumer's problem, provided the signal is sufficiently informative.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credence goods, private information, diagnosis effort, undertreatment, overtreatment, liability
• 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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