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The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition

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Author Info

  • Dulleck, Uwe

    ()
    (Queensland University of Technology)

  • Kerschbamer, Rudolf

    ()
    (University of Innsbruck)

  • Sutter, Matthias

    ()
    (European University Institute)

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 break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only 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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4030.

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Length: 67 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4030

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Keywords: credence goods; experiment; liability; verifiability; reputation; competition;

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References

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Citations

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Cited by:
  1. Loukas Balafoutas & Adrian Beck & Rudolf Kerschbamer & Matthias Sutter, 2011. "What Drives Taxi Drivers? A Field Experiment on Fraud in a Market for Credence Goods," CESifo Working Paper Series, CESifo Group Munich 3461, CESifo Group Munich.
  2. Beck, Adrian & Kerschbamer, Rudolf & Qiu, Jianying & Sutter, Matthias, 2010. "Guilt from Promise-Breaking and Trust in Markets for Expert Services – Theory and Experiment," Working Papers in Economics, University of Gothenburg, Department of Economics 436, University of Gothenburg, Department of Economics.
  3. Uwe Dulleck & Berthold U Wigger, 2012. "Expert Politicians, Electoral Control, and Fiscal Restraints," NCER Working Paper Series, National Centre for Econometric Research 79, National Centre for Econometric Research.
  4. Huck, Steffen & Zhou, Jidong, 2011. "Consumer behavioural biases in competition: A survey," MPRA Paper, University Library of Munich, Germany 31794, University Library of Munich, Germany.
  5. Kerschbamer, Rudolf & Sutter, Matthias & Dulleck, Uwe, 2009. "The Impact of Distributional Preferences on (Experimental) Markets for Expert Services," IZA Discussion Papers, Institute for the Study of Labor (IZA) 4647, Institute for the Study of Labor (IZA).

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