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The Role of Diagnostic Ability in Markets for Expert Services

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  • Fang Liu
  • Alexander Rasch
  • Marco Alexander Schwarz
  • Christian Waibel

Abstract

In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Experts may exploit their informational advantage by defrauding customers. Market institutions have been shown theoretically to be effective in mitigating fraudulent expert behavior. We analyze whether this positive result carries over to a situation in which experts are heterogeneous in their diagnostic abilities. We find that efficient market outcomes are always possible. However, inefficient equilibria can also exist. If, in equilibrium, experts provide diagnosis-independent treatments, an increase in experts’ ability or in the probability of high-ability experts might not improve relative market efficiency.

Suggested Citation

  • Fang Liu & Alexander Rasch & Marco Alexander Schwarz & Christian Waibel, 2020. "The Role of Diagnostic Ability in Markets for Expert Services," CESifo Working Paper Series 8704, CESifo.
    • Handle: RePEc:ces:ceswps:_8704
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    Cited by:

    1. Balafoutas, Loukas & Fornwagner, Helena & Kerschbamer, Rudolf & Sutter, Matthias & Tverdostup, Maryna, 2020. "Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets," IZA Discussion Papers 13848, Institute of Labor Economics (IZA).
    2. Yongmin Chen & Jianpei Li & Jin Zhang, 2022. "Efficient Liability In Expert Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1717-1744, November.
    3. Mehdi Ayouni & Thomas Lanzi, 2022. "Credence goods, consumer feedback and (in)efficiency," Working Papers of BETA 2022-27, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Bertrand Crettez & Régis Deloche & Marie‐Hélène Jeanneret‐Crettez, 2020. "A demand‐induced overtreatment model with heterogeneous experts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1713-1733, September.
    5. Parampreet Christopher Bindra & Rudolf Kerschbamer & Daniel Neururer & Matthias Sutter, 2020. "Reveal it or conceal it: On the value of second opinions in a low-entry-barriers credence goods market," ECONtribute Discussion Papers Series 004, University of Bonn and University of Cologne, Germany.
    6. Martin Obradovits & Philipp Plaickner, 2020. "Searching for Treatment," Working Papers 2020-18, Faculty of Economics and Statistics, Universität Innsbruck.
    7. Alexander Erlei & Lukas Meub, 2024. "Technological Shocks and Algorithmic Decision Aids in Credence Goods Markets," Papers 2401.17929, arXiv.org, revised Apr 2024.

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    More about this item

    Keywords

    credence good; diagnosis; expert; fraud; overtreatment; undertreatment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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