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

  • Dulleck, Uwe

    (Queensland University of Technology)

  • Rudolf, Kerschbamer

    (University of Innsbruck and CEPR)

  • Matthias, Sutter

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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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File URL: http://hdl.handle.net/2077/19527
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 348.

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Length: 66 pages
Date of creation: 02 Mar 2009
Date of revision:
Publication status: Forthcoming in American Economic Review.
Handle: RePEc:hhs:gunwpe:0348
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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