A Theory of Fraud and Over-Consumption in Experts Markets

Ingela Alger and François Salanié

No 495, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Consumers often have to rely on an expert's diagnosis to assess their needs. If the expert is also the seller of services, he may use his informational advantage to induce over-consumption. Empirical evidence suggests that over-consumption is a pervasive phenomenon in experts markets. We prove the existence of equilibrium over-consumption in an otherwise purely competitive model. This market failure results from the freedom of consumers to turn down an expert's recommendation: experts defraud consumers in order to keep them uninformed, as this deters them from seeking a better price elsewhere. Our model also yields predictions on the diagnosis price that are in line with stylized facts, and provides a theory for why risk-neutral consumers would demand extended warranties on durables.

Keywords: experts; fraud; over-consumption; extended warranties (search for similar items in EconPapers)
JEL-codes: D41 D82 L11 (search for similar items in EconPapers)
Date: 2001-04-01, Revised 2004-11-09
Note: This paper was previously circulated as "Competitive Pricing of Expert Services: Equilibrium Fraud and Partial Specialization"
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:495

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