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Liability in Markets for Credence Goods

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  • Chen, Yongmin
  • Li, Jianpei
  • Zhang, Jin

Abstract

We study the role of liability in disciplining an expert's behavior in a credence good market. The expert, who can provide two potential treatments for a consumer's problem, may misbehave in two ways: prescribing the "wrong" treatment given his private information, or failing to exert proper effort to diagnose the problem. We show that under a range of liability rules, the expert will choose the efficient treatment based on his information if the price margins for the two treatments are close enough. Moreover, a well-designed liability rule can motivate the expert to choose efficiently both the treatment and the diagnosis effort. This efficiency result continues to hold when the expert's diagnosis effort generates only a noisy signal about the nature of the consumer's problem, provided the signal is sufficiently informative.

Suggested Citation

  • Chen, Yongmin & Li, Jianpei & Zhang, Jin, 2017. "Liability in Markets for Credence Goods," MPRA Paper 80206, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:80206
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    File URL: https://mpra.ub.uni-muenchen.de/80206/1/MPRA_paper_80206.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Fong, Yuk-fai & Liu, Ting, 2018. "Liability and reputation in credence goods markets," Economics Letters, Elsevier, vol. 166(C), pages 35-39.

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    More about this item

    Keywords

    Credence goods; private information; diagnosis effort; undertreatment; overtreatment; liability;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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