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Credence goods, experts and risk aversion

Author

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  • Bonroy, Olivier
  • Lemarié, Stéphane
  • Tropéano, Jean-Philippe

Abstract

The existing literature on credence goods and expert services has overlooked the importance of risk aversion. In this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk-averse consumers. Our results show that the presence of risk aversion reduces the expert’s incentive to invest in diagnosis and may thus lead to consumers’ mistreatment.

Suggested Citation

  • Bonroy, Olivier & Lemarié, Stéphane & Tropéano, Jean-Philippe, 2013. "Credence goods, experts and risk aversion," Economics Letters, Elsevier, vol. 120(3), pages 464-467.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:3:p:464-467
    DOI: 10.1016/j.econlet.2013.05.033
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    References listed on IDEAS

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    1. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
    2. Dulleck, Uwe & Kerschbamer, Rudolf, 2009. "Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 15-23, January.
    3. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    4. Kai Sülzle & Achim Wambach, 2005. "Insurance in a Market for Credence Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(1), pages 159-176, March.
    5. 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, vol. 101(2), pages 526-555, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Helmut Bester & Matthias Dahm, 2018. "Credence Goods, Costly Diagnosis and Subjective Evaluation," Economic Journal, Royal Economic Society, vol. 128(611), pages 1367-1394, June.
    2. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2021. "Consumer information in a market for expert services: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).
    3. Bester, Helmut & Ouyang, Yaofu, 2018. "Optimal procurement of a credence good under limited liability," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 96-129.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    5. Balafoutas, Loukas & Kerschbamer, Rudolf, 2020. "Credence goods in the literature: What the past fifteen years have taught us about fraud, incentives, and the role of institutions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    6. Stephan Bartke & Reimund Schwarze, 2021. "The Economic Role and Emergence of Professional Valuers in Real Estate Markets," Land, MDPI, vol. 10(7), pages 1-20, June.
    7. Schneider, Tim & Bizer, Kilian, 2017. "Expert qualification in markets for expert services: A Sisyphean Task?," University of Göttingen Working Papers in Economics 323, University of Goettingen, Department of Economics.
    8. Dominik Erharter, 2012. "Credence goods markets, distributional preferences and the role of institutions," Working Papers 2012-11, Faculty of Economics and Statistics, Universität Innsbruck.
    9. 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.
    10. Bartke, Stephan, 2015. "The economic role of valuers in real property markets," UFZ Discussion Papers 13/2015, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    11. Ouyang, Yaofu, 2016. "Credence Goods, Risk Averse, and Optimal Insurance," MPRA Paper 70392, University Library of Munich, Germany.
    12. Schneider, Tim & Bizer, Kilian, 2017. "Effects of qualification in expert markets with price competition and endogenous verifiability," University of Göttingen Working Papers in Economics 317, University of Goettingen, Department of Economics.
    13. Schneider, Tim & Bizer, Kilian, 2017. "Building trust by qualification in a market for expert services," University of Göttingen Working Papers in Economics 309, University of Goettingen, Department of Economics.
    14. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2016. "Consumer information in a market for expert services: Experimental evidence," University of Göttingen Working Papers in Economics 285, University of Goettingen, Department of Economics.
    15. Marcel Steller & Erich Pummerer, 2021. "Auditor’s Income Taxation and Audit Quality," SAGE Open, , vol. 11(3), pages 21582440211, August.

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    More about this item

    Keywords

    Credence goods; Expert services; Risk aversion;
    All these keywords.

    JEL classification:

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

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