Expert Costs and the Role of Verifiability

Jianpei Li and Yaofu Ouyang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Credence Goods; Expert Costs; Liability; Verifiability (search for similar items in EconPapers)
JEL-codes: D21 D82 L23 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/115716/1/MPRA_paper_115716.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:74390

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