A Theory of Fraud and Over-Consumption in Experts Markets
Boston College Economics Department Working Paper No. 495
35 Pages Posted: 20 Jul 2002
Date Written: November 2004
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: Suggested Citation