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Second-Degree Moral Hazard in a Real-World Credence Goods Market

Author

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  • Balafoutas, Loukas

    (University of Innsbruck)

  • Kerschbamer, Rudolf

    (University of Innsbruck)

  • Sutter, Matthias

    (Max Planck Institute for Research on Collective Goods)

Abstract

Empirical literature on moral hazard focuses exclusively on the direct impact of asymmetric information on market outcomes, thus ignoring possible repercussions. We present a field experiment in which we consider a phenomenon that we call second-degree moral hazard – the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or the price of the service. In the market for taxi rides, our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed by their employer. This has an economically important and statistically significant positive effect on the likelihood of overcharging, with passengers in that treatment being about 13% more likely to pay higher-than-justified prices for a given ride. This indicates that second-degree moral hazard may have a substantial impact on service provision in a credence goods market.

Suggested Citation

  • Balafoutas, Loukas & Kerschbamer, Rudolf & Sutter, Matthias, 2013. "Second-Degree Moral Hazard in a Real-World Credence Goods Market," IZA Discussion Papers 7714, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7714
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    More about this item

    Keywords

    asymmetric information; moral hazard; credence goods; natural field experiment; overtreatment; overcharging; taxi;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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