Insurance coverage of customers induces dishonesty of sellers in markets for credence goods

Abstract

Honesty is a fundamental pillar for cooperation in human societies and thus for their economic welfare. However, humans do not always act in an honest way. Here, we examine how insurance coverage affects the degree of honesty in credence goods markets. Such markets are plagued by strong incentives for fraudulent behavior of sellers, resulting in estimated annual costs of billions of dollars to customers and the society as a whole. Prime examples of credence goods are all kinds of repair services, the provision of medical treatments, the sale of software programs, and the provision of taxi rides in unfamiliar cities. We examine in a natural field experiment how computer repair shops take advantage of customers' insurance for repair costs. In a control treatment, the average repair price is about EUR 70, whereas the repair bill increases by more than 80% when the service provider is informed that an insurance would reimburse the bill. Our design allows decomposing the sources of this economically impressive difference, showing that it is mainly due to the overprovision of parts and overcharging of working time. A survey among repair shops shows that the higher bills are mainly ascribed to insured customers being less likely to be concerned about minimizing costs because a third party (the insurer) pays the bill. Overall, our results strongly suggest that insurance coverage greatly increases the extent of dishonesty in important sectors of the economy with potentially huge costs to customers and whole economies.credence goods | field experiment | insurance coverage | fraud | deception D ishonest behavior is widespread in human societies. The frequency and degree of dishonest behavior has been shown to depend on social norms, or the lack thereof, for instance in the finance industry (1), on the costs and benefits of lying (2-4), or on the age of human subjects (5). Contrary to the effects of social or cultural norms or of personality traits, we study how insurance coverage-a key institutional arrangement in many important markets-affects the extent of dishonest behavior in markets for credence goods. The market for credence goods is huge and economically very important. Prime examples of credence goods are health care services and repair services. In the United States, for instance, health care services accounted for 17.9% of gross domestic product in 2012 (www.worldbank.org); repair services (such as for cars, office machines, and computers) are also a billiondollar industry (6-9). Generally speaking, credence goods have the characteristic that, although customers can observe the utility they derive from the good or service ex post, they cannot judge whether the quality of the good they have received is the ex ante needed one (10-12). Moreover, customers may not even be able to observe ex post the quality they actually received. Experience goods (like wine) are related to credence goods and also have unknown characteristics, yet these characteristics are revealed after buying or consuming them, contrary to the case...

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“…Falk and Szech [31] and Rothenhäusler et al [32] have studied morals in group voting. Kerschbamer et al [33], Bartling et al [34], and Friedrichsen and Engelmann [35] have considered ethical consumption and/or morally relevant credence goods. Our results indicate that consumers' moral excuses should receive specific attention in follow-up research.…”

Separation of prescription and treatment in health care markets: A laboratory experiment

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