The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition

Abstract

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that liability or verifiability yield efficiency, we find that liability has a crucial, but verifiability at best a minor, effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. (JEL D12, D82)

Asymmetric Information as a Barrier to Knowledge Spillovers in Expert Markets

“…This result is in line with previous studies pointing to a low demand for expert services and market breakdowns due to customers' fear of fraudulent expert behavior in markets with strongly asymmetric information (e.g. Dulleck et al, 2011;Dulleck and Kerschbamer, 2006).…”

“…The supply side of this consulting market is very heterogeneous: along with customers' inability to evaluate the service quality both before and after the transaction, this leads to a partial market failure due to distrust in expert services (see e.g. Beck et al, 2014;Dulleck et al, 2011;Dulleck and Kerschbamer, 2006). The credence good properties of the service impede experts' ability to signal higher service quality and thus act as a strong knowledge filter precluding spillovers among suppliers.…”

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

“…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)(7)(8)(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)(11)(12). Moreover, customers may not even be able to observe ex post the quality they actually received.…”

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

“…Our main results fit consistently into the existing experimental literature on credence goods. The observation that physicians are heterogeneous in their response to overtreatment incentives has also been made in Beck, Kerschbamer, Qiu, and Sutter (2013); Dulleck et al (2011);Gottschalk et al (2017);and Kerschbamer et al (2016), with a particular discussion and estimation of heterogeneity in Kerschbamer et al (2017). Nevertheless, agents respond to incentives.…”