The role of diagnostic ability in markets for expert services

Fang Liu, Alexander Rasch, Marco A. Schwarz and Christian Waibel

European Economic Review, 2025, vol. 180, issue C

Abstract: In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. They may then exploit their informational advantage by defrauding customers. Market institutions have been shown theoretically to be effective in mitigating fraudulent expert behavior. We analyze whether this positive result carries over to a situation in which experts are heterogeneous in their diagnostic abilities. We find that efficient market outcomes are always possible. Inefficient equilibria, however, can also exist. If, in equilibrium, experts provide diagnosis-independent treatments, an increase in the experts’ ability or in the probability of high-ability experts might not improve market efficiency.

Keywords: Credence good; Diagnosis; Expert; Fraud (search for similar items in EconPapers)
JEL-codes: D82 L15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:180:y:2025:i:c:s001429212500176x

DOI: 10.1016/j.euroecorev.2025.105126

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