Expert Costs and the Role of Verifiability

Jianpei Li, Yaofu Ouyang and Wanzhu Zhang

Journal of Institutional and Theoretical Economics (JITE), 2024, vol. 180, issue 1, 17-42

Abstract: We analyze a credence goods market where the expert may have a high or low cost in repairing a major problem, assuming that (i) the expert is liable for the outcome of the treatment (liability), and (ii) the type of treatment is verifiable by the consumer (verifiability). With just liability, an inefficiency arises because not all major problems are resolved in equilibrium. With both verifiability and liability, another inefficiency arises because minor problems are sometimes fixed through costly major treatments (overtreatment). Adding verifiability improves social welfare because a major problem is resolved with a higher probability despite the overtreatment costs.

Keywords: credencegoods; treatmentcosts; liability; verifiability; credence goods; treatment costs (search for similar items in EconPapers)
JEL-codes: D21 D82 L23 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1628/jite-2023-0029

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