Credence Goods, Costly Diagnosis, and Subjective Evaluation

Helmut Bester and Matthias Dahm

No 10254, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low-cost service is sufficient or whether a high-cost treatment is required to solve the consumer?s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low-cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer?s report, or subjective evaluation. A failure of the low-cost treatment delays the solution of the consumer?s problem by the high-cost treatment to a second period. We show that the first-best solution can always be implemented if the parties? discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first-best can be obtained. In an extension we show that the first-best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.

Keywords: Credence goods; Information acquisition; Moral hazard; Subjective evaluation (search for similar items in EconPapers)
JEL-codes: D82 D83 D86 I11 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cepr.org/publications/DP10254 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Credence Goods, Costly Diagnosis, and Subjective Evaluation (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10254

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10254

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().