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The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition

  • Uwe Dulleck

    ()

    (QUT)

  • Rudolf Kerschbamer

    ()

    (University of Innsbruck)

  • Matthias Sutter

    ()

    (University of Innsbruck and University of Gothenburg)

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.

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File URL: http://www.ncer.edu.au/papers/documents/WPNo42.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 42.

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Date of creation: 02 Mar 2009
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Handle: RePEc:qut:auncer:2009_55
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Web page: http://www.ncer.edu.au

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