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A Theory of Fraud and Over-Consumption in Experts Markets

Boston College Economics Department Working Paper No. 495

35 Pages Posted: 20 Jul 2002  

Ingela Alger

University of Toulouse 1 - Toulouse School of Economics (TSE); French National Center for Scientific Research (CNRS)

Francois Salanie

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: November 2004

Abstract

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.

Keywords: Experts, fraud, over-consumption

JEL Classification: D43, D82, L11

Suggested Citation

Alger, Ingela and Salanie, Francois, A Theory of Fraud and Over-Consumption in Experts Markets (November 2004). Boston College Economics Department Working Paper No. 495. Available at SSRN: https://ssrn.com/abstract=317299 or http://dx.doi.org/10.2139/ssrn.317299

Ingela Alger (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

French National Center for Scientific Research (CNRS) ( email )

3, rue Michel-Ange
Paris cedex 16, 75794
France

Francois Salanie

National Institute for Agricultural Research (INRA) ( email )

21, Allee de Brienne
31000 Toulouse
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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