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An Empirical Examination of Moral Hazard in the Vehicle Inspection Market

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  • Thomas N. Hubbard
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    Abstract

    Moral hazard arises in "diagnosis-cure" markets such as auto repair and health care when sellers have an incentive to misrepresent a buyer's condition in order to increase demand for the treatments they supply. This article examines the market for California vehicle emission inspections. Using transaction-level data, I investigate whether the market provides incentives that lead inspectors to help vehicles pass and how the behavior of inspectors varies with their firm's organizational characteristics. I find that consumers are generally able to provide firms and inspectors incentives to help them pass, and I find cross-firm differences that are consistent with agency theory.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 29 (1998)
    Issue (Month): 2 (Summer)
    Pages: 406-426

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    Handle: RePEc:rje:randje:v:29:y:1998:i:summer:p:406-426

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    Cited by:
    1. Steven D. Levitt & Chad Syverson, 2005. "Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions," NBER Working Papers 11053, National Bureau of Economic Research, Inc.
    2. Christopher C. Afendulis & Daniel P. Kessler, 2006. "Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care," NBER Working Papers 12623, National Bureau of Economic Research, Inc.
    3. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2011. "The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition," American Economic Review, American Economic Association, American Economic Association, vol. 101(2), pages 526-55, April.
    4. Meyerhoefer, Chad D. & Pylypchuk, Vuriy, 2008. "AJAE Appendix: Does Participation in the Food Stamp Program Increase the Prevalence of Obesity and Health Care Spending?," American Journal of Agricultural Economics Appendices, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 90(2), May.
    5. Dimitrios Varvarigos, 2013. "Economic Growth, Health, and the Choice of Polluting Technologies: The Role of Bureaucratic Corruption," Discussion Papers in Economics, Department of Economics, University of Leicester 13/22, Department of Economics, University of Leicester.
    6. Harrington, Winston & McConnell, Virginia, 1999. "Coase and Car Repair: Who Should Be Responsible for Emissions of Vehicles in Use?," Discussion Papers, Resources For the Future dp-99-22, Resources For the Future.
    7. Toshiaki Iizuka, 2012. "Physician Agency and Adoption of Generic Pharmaceuticals," American Economic Review, American Economic Association, American Economic Association, vol. 102(6), pages 2826-58, October.
    8. Wayne Dunham, 2003. "Moral Hazard and the Market for Used Automobiles," Review of Industrial Organization, Springer, Springer, vol. 23(1), pages 65-83, August.
    9. Ando, Amy & Harrington, Winston & McConnell, Virginia D., 2007. "Fees in an Imperfect World: An Application to Motor Vehicle Emissions," Discussion Papers, Resources For the Future dp-07-34, Resources For the Future.
    10. Uwe Dulleck & David Johnston & Rudolf Kerschbamer & Matthias Sutter, 2012. "The good, the bad and the naive: Do fair prices signal good types or do they induce good behaviour?," Working Papers, Faculty of Economics and Statistics, University of Innsbruck 2012-03, Faculty of Economics and Statistics, University of Innsbruck.
    11. Andrew Epstein & Jonathan D. Ketcham & Sean Nicholson, 2008. "Professional Partnerships and Matching in Obstetrics," NBER Working Papers 14070, National Bureau of Economic Research, Inc.
    12. Lamar Pierce & Michael W. Toffel, 2010. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Harvard Business School Working Papers, Harvard Business School 11-004, Harvard Business School, revised Feb 2012.
    13. Eleni Stathopoulou & Dimitrios Varvarigos, 2013. "Corruption, Entry and Pollution," Discussion Papers in Economics, Department of Economics, University of Leicester 13/21, Department of Economics, University of Leicester.
    14. C. Kirabo Jackson & Henry S. Schneider, 2013. "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay," NBER Working Papers 19645, National Bureau of Economic Research, Inc.

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