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Expert Costs and the Role of Verifiability

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  • Li, Jianpei
  • Ouyang, Yaofu

Abstract

We study a credence goods market in which an expert holds private information about his treatment cost besides his superior knowledge about the nature of the consumer’s problem. Under the assumption of liability, cheating may occur through overcharging—a price for major treatment is charged while a minor treatment is provided, while under liability and verifiability, cheating can only occur through costly overtreatment of minor problems. Neither liability nor liability and verifiability achieves socially efficient outcome. Adding verifiability improves social welfare because it increases the probability that a major problem is repaired and the associated overtreatment cost is dominated by the gain from more problems being repaired.

Suggested Citation

  • Li, Jianpei & Ouyang, Yaofu, 2016. "Expert Costs and the Role of Verifiability," MPRA Paper 74390, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:74390
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    References listed on IDEAS

    as
    1. Ting Liu, 2011. "Credence Goods Markets With Conscientious And Selfish Experts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 227-244, February.
    2. Uwe Dulleck & Jiong Gong & Jianpei Li, 2015. "Contracting for Infrastructure Projects as Credence Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(3), pages 328-345, June.
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    6. Dulleck, Uwe & Kerschbamer, Rudolf, 2009. "Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 15-23, January.
    7. James J. Anton & Dennis A. Yao, 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 538-552, Winter.
    8. Emons, Winand, 2001. "Credence goods monopolists," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 375-389, March.
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    12. Nathaniel G. Hilger, 2016. "Why Don't People Trust Experts?," Journal of Law and Economics, University of Chicago Press, vol. 59(2), pages 293-311.
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    More about this item

    Keywords

    Credence Goods; Expert Costs; Liability; Verifiability;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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