An Empirical Examination of Moral Hazard in the Vehicle Inspection Market

Thomas N. Hubbard

RAND Journal of Economics, 1998, vol. 29, issue 2, 406-426

Abstract: Moral hazard arises in "diagnosis-cure" markets such as auto repair and health care when sellers have an incentive to misrepresent a buyer's condition in order to increase demand for the treatments they supply. This article examines the market for California vehicle emission inspections. Using transaction-level data, I investigate whether the market provides incentives that lead inspectors to help vehicles pass and how the behavior of inspectors varies with their firm's organizational characteristics. I find that consumers are generally able to provide firms and inspectors incentives to help them pass, and I find cross-firm differences that are consistent with agency theory.

Date: 1998
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