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A Theory of Fraud and Over-Consumption in Experts Markets

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Author Info

  • Ingela Alger

    ()
    (Boston College)

  • Francois Salanie

    ()
    (INRA-LEERNA, Toulouse)

Abstract

Consumers often have to rely on an expert's diagnosis to assess their needs. If the expert is also the seller of services, he may use his informational advantage to induce over-consumption. Empirical evidence suggests that over-consumption is a pervasive phenomenon in experts markets. We prove the existence of equilibrium over-consumption in an otherwise purely competitive model. This market failure results from the freedom of consumers to turn down an expert's recommendation: experts defraud consumers in order to keep them uninformed, as this deters them from seeking a better price elsewhere. Our model also yields predictions on the diagnosis price that are in line with stylized facts, and provides a theory for why risk-neutral consumers would demand extended warranties on durables.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 495.

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Date of creation: 01 Apr 2001
Date of revision: 09 Nov 2004
Handle: RePEc:boc:bocoec:495

Note: This paper was previously circulated as "Competitive Pricing of Expert Services: Equilibrium Fraud and Partial Specialization"
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Related research

Keywords: experts; fraud; over-consumption; extended warranties;

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Cited by:
  1. Uwe Dulleck & Rudolf Kerschbamer, 2007. "Experts vs. Discounters: Consumer Free Riding and Experts Withholding Advice in Markets for Credence Goods," Working Papers 2007-21, Faculty of Economics and Statistics, University of Innsbruck.
  2. Kyle Hyndman & Saltuk Ozerturk, 2008. "Consumer Information in a Market for Expert Services," Departmental Working Papers 0801, Southern Methodist University, Department of Economics.
  3. Uwe Dulleck & Jianpei Li, 2011. "Contracting for Infrastructure Projects as Credence Goods," NCER Working Paper Series, National Centre for Econometric Research 73, National Centre for Econometric Research.
  4. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2009. "The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition," Working Papers 2009-03, Faculty of Economics and Statistics, University of Innsbruck.
  5. De Jaegher, Kris, 2010. "Physician incentives: Cure versus prevention," Journal of Health Economics, Elsevier, vol. 29(1), pages 124-136, January.

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