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Efficient Liability in Expert Markets

Yongmin Chen (), Jianpei Li and Jin Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: We study the design of efficient liability in expert markets. An expert may misbehave in two ways: prescribing the "wrong" treatment for a consumer's problem, or failing to exert proper effort to diagnose the problem. We show that under a range of liabilities, the expert will choose the efficient treatment based on his information if the price margins for alternative treatments are close enough. Moreover, a well-designed liability rule motivates the expert to also exert diagnosis effort efficiently. The efficient liability is facilitated by certain restriction on equilibrium prices; unfettered competition between experts, while maximizing consumer surplus, may undermine efficiency.

Keywords: Credence goods; experts; liability; diagnosis effort; undertreatment; overtreatment (search for similar items in EconPapers)
JEL-codes: D82 I18 K13 L23 (search for similar items in EconPapers)
Date: 2018-06-03, Revised 2018-06-03
New Economics Papers: this item is included in nep-gth, nep-knm, nep-law and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:87317

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