A Theory of Fraud and Over-Consumption in Experts Markets
University of Toulouse 1 - Toulouse School of Economics (TSE); French National Center for Scientific Research (CNRS)
National Institute for Agricultural Research (INRA)
Boston College Economics Department Working Paper No. 495
Consumers often have to rely on an expert's diagnosis to assess their needs. If the expert is also the seller of services, he may use his informational advantage to induce over-consumption. Empirical evidence suggests that over-consumption is a pervasive phenomenon in experts markets. We offer and discuss conditions leading to equilibrium over-consumption in an otherwise purely competitive model. This market failure results from the freedom of consumers to turn down an expert's recommendation: experts defraud consumers in order to keep them uninformed, as this deters them from seeking a better price elsewhere. Our model also yields predictions on the diagnosis price that are in line with stylized facts.
Number of Pages in PDF File: 35
Keywords: Experts, fraud, over-consumption
JEL Classification: D43, D82, L11
Date posted: July 20, 2002
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