Second‐Degree Moral Hazard in a Real‐World Credence Goods Market

18 Pages Posted: 6 Feb 2017  

Loukas Balafoutas

University of Innsbruck

Rudolf Kerschbamer

University of Innsbruck; Centre for Economic Policy Research (CEPR)

Matthias Sutter

University of Innsbruck; University of Gothenburg - Department of Economics; IZA Institute of Labor Economics

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Date Written: February 2017

Abstract

In a field experiment in the market for taxi rides we investigate a phenomenon called second‐degree moral hazard – the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or price of the service. Our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed. This has a strong positive effect on the likelihood and the amount of overcharging and consequently increases consumer expenditure. Our results suggest that second‐degree moral hazard may have a severe impact on the provision of credence goods.

Suggested Citation

Balafoutas, Loukas and Kerschbamer, Rudolf and Sutter, Matthias, Second‐Degree Moral Hazard in a Real‐World Credence Goods Market (February 2017). The Economic Journal, Vol. 127, Issue 599, pp. 1-18, 2017. Available at SSRN: https://ssrn.com/abstract=2910723 or http://dx.doi.org/10.1111/ecoj.12260

Loukas Balafoutas (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Rudolf Kerschbamer

University of Innsbruck ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria
+43 512 507 7400 (Phone)
+43 512 507 2980 (Fax)

HOME PAGE: http://www.uibk.ac.at/c/c4/c409/staff/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Matthias Sutter

University of Innsbruck ( email )

Universitaetsstr. 15/4
A-6020, Innsbruck
Austria

University of Gothenburg - Department of Economics ( email )

Box 640
Vasagatan 1, E-building, floor 5 & 6
Göteborg, 40530
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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