Efficient Liability in Expert Markets

When providing professional services, an expert may misbehave by either prescribing the "wrong" treatment for a consumer's problem or failing to exert proper effort to diagnose it. We show that under a range of liabilities the expert will recommend the appropriate treatment based on his private information if price margins for alternative treatments are close enough; however, a well-designed liability rule is essential for also motivating efficient diagnosis effort. We further demonstrate that unfettered price competition between experts may undermine the efficient role of liability, whereas either a minimum-price constraint or an obligation-to-serve requirement can restore it.