The Role of Diagnostic Ability in Markets for Expert Services
Marco Schwarz and
No 8704, CESifo Working Paper Series from CESifo
In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Experts may 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. However, inefficient equilibria can also exist. If, in equilibrium, experts provide diagnosis-independent treatments, an increase in experts’ ability or in the probability of high-ability experts might not improve relative market efficiency.
Keywords: credence good; diagnosis; expert; fraud; overtreatment; undertreatment (search for similar items in EconPapers)
JEL-codes: D82 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
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Working Paper: The role of diagnostic ability in markets for expert services (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8704
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