The Role of Diagnostic Ability in Markets for Expert Services

36 Pages Posted: 9 Dec 2019

See all articles by Fang Liu

Fang Liu

Heinrich Heine University Dusseldorf

Alexander Rasch

Duesseldorf Institute for Competition Economics (DICE); ZEW – Leibniz Centre for European Economic Research

Marco A. Schwarz

University of Innsbruck - Department of Economics; University of Innsbruck - Faculty of Social and Economic Sciences

Christian Waibel

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: November 21, 2019

Abstract

In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Experts may exploit their informational advantage by defrauding customers. Market institutions have been shown theoretically to be effective in mitigating fraudulent expert behavior. We analyze whether this positive result carries over to when experts are heterogeneous in their diagnostic abilities. We find that efficient market outcomes are always possible. However, inefficient equilibria can also exist. When such inefficient equilibria are played, a larger share of high-ability experts can lead to more inefficiencies relative to the efficient equilibria.

Keywords: Credence Good, Diagnosis, Expert, Fraud, Over-treatment, Under-treatment

JEL Classification: D82, L15

Suggested Citation

Liu, Fang and Rasch, Alexander and Schwarz, Marco A. and Waibel, Christian, The Role of Diagnostic Ability in Markets for Expert Services (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3491607 or http://dx.doi.org/10.2139/ssrn.3491607

Fang Liu

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

Alexander Rasch (Contact Author)

Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitätsstraße 1
Dusseldorf, 40225
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Marco A. Schwarz

University of Innsbruck - Department of Economics ( email )

Austria

HOME PAGE: http://sites.google.com/site/marcoaschwarz/home

University of Innsbruck - Faculty of Social and Economic Sciences ( email )

Innsbruck, A-6020
Austria

Christian Waibel

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
37
Abstract Views
355
PlumX Metrics