In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Because experts provide both the diagnosis and the treatment, there is opportunity for fraud. We experimentally investigate how the intensity of price competition and the level of customer information about past expert behavior inuence experts' incentives to defraud their customers when experts can build up reputation. We show that the level of fraud is signicantly higher under price competition than when prices are xed, as the price decline under a competitive-price regime inhibits quality competition. More customer information does not necessarily reduce the level of fraud.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in March 2015 AbstractThis paper investigates the impact of four key economic variables on an expert firm's incentive to defraud its customers in a credence goods market: the level of competition, the expert firm's financial situation, its competence, and its reputational concerns. We use and complement the dataset of a nationwide field study conducted by the German Automobile Association that regularly checks the reliability of garages in Germany. We find that more intense competition and high competence lower a firm's incentive to overcharge. A low concern for reputation and a critical financial situation increase the incentive to overcharge.Keywords: Asymmetric information; Auto repair market; Credence goods; Expert; Fraud; Overcharging. JEL Classification: D82; L15. * We would like to thank Hans-Jürgen Andreß, Florian Gössl, David Jaeger, Rudolf Kerschbamer, Wanda Mimra, Michael Pfaffermayr, Lamar Pierce, Bettina Rockenbach, Henry S. Schneider, Matthias Sutter, Achim Wambach, Roberto Weber, Achim Zeileis, and seminar audiences in Cologne, Duesseldorf (DICE), Munich (LMU), and Vallendar (WHU) for very helpful comments and discussions. We are also very grateful to Lisa Boxberg, Sarah Dahmen, Nicolas Fugger, and Marlene Scholz who provided excellent research assistance. Part of this research was done while Christian Waibel was visiting the University of Innsbruck. He would like to express his sincere thanks to the University of Innsbruck for its hospitality throughout his stay.
In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Because experts provide both the diagnosis and the treatment, there is opportunity for fraud. We experimentally investigate how the intensity of price competition and the level of customer information about past expert behavior inuence experts' incentives to defraud their customers when experts can build up reputation. We show that the level of fraud is signicantly higher under price competition than when prices are xed, as the price decline under a competitive-price regime inhibits quality competition. More customer information does not necessarily reduce the level of fraud.
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