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Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets

Author

Listed:
  • Loukas Balafoutas

    (University of Exeter, United Kingdom; University of Innsbruck, Austria)

  • Helena Fornwagner

    (University of Exeter, United Kingdom; Austrian Institute of Economic Research (WIFO))

  • Rudolf Kerschbamer

    (University of Innsbruck, Austria)

  • Matthias Sutter

    (University of Innsbruck, Austria; Max Planck Institute for Research on Collective Goods, IZA Bonn and CESifo Munich, Germany; University of Cologne, Germany)

  • Maryna Tverdostup

    (Vienna Institute for International Economic Studies, Austria)

Abstract

In markets for credence goods – such as health care or repair services – fraudulent behavior by better informed experts is a common problem. Our model studies how four common features shape experts’ provision behavior in credence goods markets: (i) diagnostic uncertainty of experts; (ii) insurance coverage of consumers; (iii) malpractice payments for treatment failure; and (vi) consumer-regarding preferences of experts. Diagnostic imprecision unambiguously leads to less efficient provision. Insurance coverage and malpractice payments have an ambiguous effect on efficient provision. The impact of consumer-regarding preferences on efficiency is positive without insurance but ambiguous in the presence of insurance.

Suggested Citation

  • Loukas Balafoutas & Helena Fornwagner & Rudolf Kerschbamer & Matthias Sutter & Maryna Tverdostup, 2023. "Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets," ECONtribute Discussion Papers Series 257, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:257
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    Cited by:

    1. 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).
    2. 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.
    3. Lagarde, Mylène & Blaauw, Duane, 2022. "Overtreatment and benevolent provider moral hazard: Evidence from South African doctors," Journal of Development Economics, Elsevier, vol. 158(C).
    4. 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.
    5. Evert Reins, 2021. "Seductive subsidies? An analysis of second-degree moral hazard in the context of photovoltaic solar systems," IRENE Working Papers 21-03, IRENE Institute of Economic Research.
    6. Alexander Erlei & Lukas Meub, 2024. "Technological Shocks and Algorithmic Decision Aids in Credence Goods Markets," Papers 2401.17929, arXiv.org, revised Apr 2024.
    7. Minyan Zhu, 2021. "Evidence-Based Medicine and Healthcare Quality in the Context of Information Failure: The Case of the UK Fertility Sector," PharmacoEconomics - Open, Springer, vol. 5(4), pages 561-576, December.
    8. Lagarde, Mylène & Blaauw, Duane, 2022. "Overtreatment and benevolent provider moral hazard: evidence from South African doctors," LSE Research Online Documents on Economics 115383, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Credence goods; diagnostic uncertainty; insurance coverage; social preferences;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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