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Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets

Loukas Balafoutas (), Helena Fornwagner, Rudolf Kerschbamer (), Matthias Sutter () and Maryna Tverdostup ()

No 8681, CESifo Working Paper Series from CESifo

Abstract: Credence goods markets – like for health care or repair services – with their informational asymmetries between sellers and customers are prone to fraudulent behavior of sellers and resulting market inefficiencies. We present the first model that considers both diagnostic uncertainty of sellers and the effects of insurance coverage of consumers in a unified framework. We test the model’s predictions in a laboratory experiment. Both in theory and in the experiment diagnostic uncertainty decreases the rate of efficient service provision and leads to less trade. In theory, insurance also decreases the rate of efficient service provision, but at the same time it also increases the volume of trade, leading to an ambiguous net effect on welfare. In the experiment, the net effect of insurance coverage on efficiency turns out to be positive. We also uncover an important interaction effect: if consumers are insured, experts invest less in diagnostic precision. We discuss policy implications of our results.

Keywords: credence goods; diagnostic uncertainty; insurance coverage; welfare; model; experiment (search for similar items in EconPapers)
JEL-codes: C72 C91 D82 G22 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-exp and nep-ias
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Working Paper: Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets (2020) Downloads
Working Paper: Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets (2020) Downloads
Working Paper: Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets (2020) Downloads
Working Paper: Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets (2020) Downloads
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