Where Are The Problems with Credence Goods?
With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The present paper presents conditions under which market institutions solve the fraudulent expert problem at no cost and characterizes the inefficiencies that arise if at least one of these conditions is violated. Our analysis not only permits a clearer discrimination between situations in which markets prevent fraud and those in which they do not; it also helps to identify the forces driving the different inefficiency results derived in the literature.
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