Working Paper: CEPR ID: DP3016
Authors: Uwe Dulleck; Rudolf Kerschbamer
Abstract: In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The variety of results has fostered the impression that the equilibrium behaviour of experts and consumers in credence goods markets sensitively depends on the details of the models. The present Paper shows that the results for the majority of the specified models can be reproduced in a very simple unifying framework. Our model is constructed so that an efficient solution is reached if a small number of critical assumptions are satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. Existing results are generalized, some previous interpretations of the forces leading to the striking differences in outcomes are questioned, and a new source for inefficiencies is identified.
Keywords: credence goods; experts; fraud
JEL Codes: D40; D82; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large economies of scope between diagnosis and treatment (I11) | efficient solution (D61) |
| violation of large economies of scope (F12) | overcharging or excessive search and diagnosis costs (D42) |
| verifiability of treatment type or liability rule (K13) | prevention of undertreatment (I12) |
| absence of verifiability or liability rule (D81) | market failure (D52) |
| homogeneity among consumers (D16) | expert's behavior aligns with efficient service provision (L84) |
| deviation from homogeneity (C21) | inefficiencies such as overtreatment and overcharging (D61) |