The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition
Queensland University of Technology - School of Economics and Finance
University of Innsbruck; Centre for Economic Policy Research (CEPR)
University of Innsbruck; University of Gothenburg - Department of Economics; Institute for the Study of Labor (IZA)
Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.
Keywords: Credence goods, Experiment, Liability, Verifiability, Reputation, Competition
JEL Classification: C72, C91, D40, D82working papers series
Date posted: March 6, 2009
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