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The Impact of Distributional Preferences on (Experimental) Markets for Expert Services

  • Kerschbamer, Rudolf

    ()

    (University of Innsbruck)

  • Sutter, Matthias

    ()

    (University of Cologne)

  • Dulleck, Uwe

    ()

    (Queensland University of Technology)

Credence goods markets suffer from inefficiencies arising from informational asymmetries between expert sellers and customers. While standard theory predicts that inefficiencies disappear if customers can verify the quality received, verifiability fails to yield efficiency in experiments with endogenous prices. We identify heterogeneous distributional preferences as the main cause and design a parsimonious experiment with exogenous prices that allows classifying experts as either selfish, efficiency loving, inequality averse, inequality loving or competitive. Results show that most subjects exhibit non-standard distributional preferences, among which efficiency-loving and inequality aversion are most frequent. We discuss implications for institutional design and agent selection in credence goods markets.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4647.

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Length: 52 pages
Date of creation: Dec 2009
Date of revision:
Publication status: forthcoming with new title "How social preferences shape incentives in (experimental) markets for credence goods" in: Economic Journal (accepted February 2015)
Handle: RePEc:iza:izadps:dp4647
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  1. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  2. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 53-74, February.
  3. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
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  6. Uwe Dulleck & Rudolf Kerschbamer, 2003. "Price Discrimination in Markets for Experts´ Services," Vienna Economics Papers 0312, University of Vienna, Department of Economics.
  7. Huck, Steffen & Ruchala, Gabriele K. & Tyran, Jean-Robert, 2007. "Pricing and Trust," CEPR Discussion Papers 6135, C.E.P.R. Discussion Papers.
  8. Wolfgang Pesendorfer & Asher Wolinsky, 2003. "Second Opinions and Price Competition: Inefficiency in the Market for Expert Advice," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 417-437, 04.
  9. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository 2013/5927, ULB -- Universite Libre de Bruxelles.
  10. Winand Emons, 1995. "Credence Goods Monopolists," Diskussionsschriften dp9501, Universitaet Bern, Departement Volkswirtschaft.
  11. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  12. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2009. "The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition," Working Papers 2009-03, Faculty of Economics and Statistics, University of Innsbruck.
  13. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
  14. Ingela Alger & François Salanié, 2006. "A Theory of Fraud and Overtreatment in Experts Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 853-881, December.
  15. 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.
  16. Dulleck, Uwe & Kerschbamer, Rudolf, 2005. "Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need," CEPR Discussion Papers 5242, C.E.P.R. Discussion Papers.
  17. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  18. Urs Fischbacher & Simon Gaechter & Ernst Fehr, . "Are People Conditionally Cooperative? Evidence from a Public Goods Experiment," IEW - Working Papers 016, Institute for Empirical Research in Economics - University of Zurich.
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